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.
