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May 2015

A Transparent Trust is a trust in which the sole beneficiary (the person receiving the assets) serves as the sole Trustee (the person responsible for managing and distributing the assets). This means an adult child can both receive and manage the assets of the Trust.

For example, Bill and Judy set up a Transparent Trust for their son, Matt.  Matt will be the Trustee of the Transparent Trust.  As beneficiary, Matt could appoint the property at any time to his children free of any gift tax.  The Transparent Trust lasts for Matt’s lifetime.  When he dies, the Trust goes to his children.

The benefit of a Transparent Trust is that it requires Matt to keep the funds in a trust account that is separate from his own funds.  Matt, as the Trustee, can only spend the trust funds on his own health, education, maintenance and support; his spouse, for example, has no access to the trust.  After Matt dies, the trust assets go to his children.

The trust account is usually named “Trust for [Child] u/a [Parent] dated [mm/dd/yyyy].” (The ‘u/a’ means “under agreement”).  The “agreement” is his parents’ Revocable Trust that contains the Transparent Trust.  Matt must then set up a trust account at a financial institution and manage it, as Trustee, in accordance with the Transparent Trust provisions of his parent’s Revocable Trust.

WHEN IS A TRANSPARENT TRUST APPROPRIATE?

A Transparent Trust is often recommended so that that property bequeathed to a child could then be passed down to the grandchildren.  Without the Transparent Trust, if Matt, for instance, were to remarry, his property, upon his death, would go to that spouse instead of his own children.  So, a Transparent Trust is ideal for those who want to make sure the property passes to their grandchildren if the child dies and to prevent property from going outside the family.

Also, a Transparent Trust is ideal for those who do not want to burden their child with a bank trustee, regular accountings and yearly income tax returns.  The child just reports the trust account income on Schedule E of his or her income tax return.  And, the child does not have to ask a bank or other Trustee for money. 

WHAT ARE POTENTIAL DISADVANTAGES TO A TRANSPARENT TRUST? 

Like an outright inheritance, the child has control over the disposition of the funds in a Transparent Trust.  And, as such, it is subject to the claims of creditor including spouses or state or federal governments.  In that regard, a Transparent Trust is NOT advised if the child is deep in debt, on the verge of a divorce, subject to lawsuits because of malpractice claims, or receives or will likely receive public benefits.  The lender, spouse, victim, or the state could seize the funds in the Transparent Trust.  In those instances, there are better ways of protecting the inheritance such as an Asset Protection Trust.

 

An Installment Trust is a type of trust where the assets in the trust are disbursed in installments based on the age of the recipient. For example, a typical payment schedule is to pay the trust property to the beneficiary in three installments.  The trust gives the beneficiary  one-third of the trust at age 25, one-half at age 30, and the balance at age 35.

There are 3 roles in an Installment Trust: 

  • The Settlor – the person creating the trust
  • The Trustee – the person responsible for investing and protecting the trust property until it is paid out to the beneficiary
  • The Beneficiary – The person who will receive the assets of the trust

So in an Installment Trust, the settlor sets up a trust for the beneficiary and the trustee manages the assets and then gives them to the beneficiary at certain triggering events.

The settlor typically also gives the trustee the discretionary power to pay Trust income and principal to the beneficiary at any time, if needed, prior to the set distributions.  These discretionary payments are typically limited to certain goals, such as education, health, maintenance, and support.   

When is an Installment Trust appropriate?

An Installment Trust is appropriate for clients who want to eventually leave property outright to their children, but don’t want to give it to the children while they are young.  For instance, if you pass away when your children are ages 6 and 8 and leave them money outright, two things happen.  First, the court has to oversee everything that goes on with the funds while the children are minors.  Second, at the age of 18 they get it all with no strings attached.  That can be a disaster.  Picture an 18 year old with all of your money to spend freely on new cars, boats, gambling, risky investments, parties, and gifts for a girlfriend/boyfriend.  The priorities the child has at age 18 are not likely the ones the child will have at age 30 or 35.  For most people, their child’s fiscal immaturity is a problem.  One solution is to use an Installment Trust to allow them to delay when the child gets the funds, but then ultimately give the funds to the child at a more mature age.  For certain clients, that’s exactly what they want.

 Are there other scenarios when an Installment Trust is appropriate?

An Installment Trust can also be combined with certain goals that the child must attain before becoming entitled to payment, such as completing college or remaining drug and crime free.  These added conditions are known as Incentive Trusts.

 Are there any potential downsides or times when an Installment Trust is not a good idea?

Like all types of trusts, an Installment Trust has a specific purpose – to delay control of the property until the child is mature enough to manage it.  If a client is concerned about a child having creditor problems or losing property in a liability lawsuit or divorce settlement, or if the client wants to ensure the money stays in the family after the child’s death, an Installment Trust might not be the best choice.  An Asset Protection Trust  or Transparent Trust is more suitable for these situations.  Yet, for many parents, an Installment Trust is an ideal solution to protecting property for young children until they become mature enough to use it responsibly.  

As you can imagine, there are many potential future situations to think through when drafting an Installment Trust. At Cipparone & Zaccaro, we have over 75 years combined experience in estate and trust planning. Call (860)442-0150 today to learn how we can help you.