Determining whether lifetime gifts should be made in trust.

• Author: Ellentuck, Albert B.
• Position: Case study

Facts: Gill Bates, a multibillionaire, is considering creating a trust to hold his esteemed art collection, some stock and real estate.

Issue: Bates asks his tax adviser for the pros and cons of holding all (or some) of his property in a trust structure.

Analysis

Lifetime transfers of property can be grouped into two categories: (1) transfers in trust and (2) nontrust transfers. Transfers in trust can be revocable or irrevocable. Nontrust transfers can include outright gifts and transfers of partial interests (such as life estates and remainder interests).

In general, if a client's estate planning goals and objectives can be met without using a trust, trusts should be avoided. Nontrust transfers are simpler and more economical, while transfers in trust require preparation of a trust instrument, trustee fees, tax return preparation fees and, possibly, accounting fees. A client should understand the benefits provided by trusts in conjunction with his goals and objectives; if no special reason exists to use a trust vehicle, the transfer should be made outright to the donee.

Advantages of Using a Trust

The client's unique circumstances usually determine the value of using a trust. In some situations, the need for a trust may be obvious; in others it may not be so clear. Clients may be aware of only some of the advantages and disadvantages, so a certain amount of client education may be necessary before the plan is finalized.

Advantages of using a trust for lifetime transfers include the following items.

1. Professional management of assets. A trustee manages the property on behalf of the beneficiaries. The donor can specify whatever powers and duties he wishes to confer on the trustee. Professional management is a necessity in some situations, such as when the donee is incapable of managing the transferred property. A transfer in trust may also be appropriate when the property owner does not want to deal directly with the burdens of property ownership (e.g., an elderly widow who owns rental real estate). The trust can be revocable or irrevocable. For transfers to minor children, an alternative is a gift under the Uniform Gifts to Minors Act or Uniform Transfers to Minors Act, which would allow the donor to act as custodian of the property until the minor reaches majority.

2. Flexibility in making dispositions of property over time. The donor can set the parameters for distributions of income and principal to beneficiaries. The trustee can be...