Transparent Trust

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.

Most people do not realize that there are many ways to leave property to your children.  For children who do not receive public benefits, these include:

Outright.  Your children receive your property, no strings attached.  It is simple and clean.  It also means that a child can spend it unwisely or fail to properly manage it.  A child can commingle it with other money, and creditors can seize it.  Your grandchildren might never receive it.  If your child dies, the property could pass to the child’s spouse, the spouse could remarry, and all of it could go to the spouse’s new mate. 

Uniform Transfers to Minors Act.  If your child is a minor, you can have your Executor choose a Custodian for the child under the Uniform Transfers to Minors Act (UTMA) and transfer the property to the Custodian.  The Custodian would then put the funds in a UTMA account and spend the funds on the child’s needs as they arise.  At the age of 21, the child receives the balance of the account outright.  Once the child receives the balance, all of the advantages and disadvantages of outright distribution apply. 

Installment Trust.  You can choose to delay the receipt of property until the child reaches a certain age by leaving it for them in trust.  It does not prevent the child from obtaining access to the property; the child can always ask the Trustee for distributions of principal or income.  The Trustee may provide for expenses such as a wedding, purchase a home, or establish a business or profession.  You can give direction to the Trustee on proper distributions from the trust.  When the child reaches the age you chose in the trust document, the Trustee distributes the balance of the trust to the child.  Once the child receives the balance, all of the advantages and disadvantages of outright distribution apply. 

Transparent Trust.  A Transparent Trust holds property in trust for the life of an adult child.  The child would be the sole Trustee of the trust.  The Trustee can make distributions for his or her support in reasonable comfort, maintenance in his or her accustomed manner of living, education, and health.  The child can appoint the property at any time to his or her own children.  Upon your child’s death, all of the property goes to your grandchildren.  The advantage of a Transparent Trust is that it requires the child to keep the funds in a separate account as Trustee and spend it only for the child or his or her children.  If a spouse of a child wants to spend it, the child can say “I am sorry, that money was given to me by my parents for my health, education, maintenance and support, and after I die, it goes to our children.”  The funds in the trust would be subject to claims of creditors because the child has control over the disposition of the funds.  The child would show any income from the trust on Schedule E of the child’s income tax return, so no separate tax return is required. 

Asset Protection Trust.  An Asset Protection Trust protects assets from creditors and spouses during your child’s lifetime.  Either you or your child can appoint an independent Trustee.  A trusted family member, friend, or professional trustee would be the best to choose for an independent Trustee.  As the Trustee deems advisable, the Trustee can spend the funds on behalf of your child.  The child could also borrow funds from the Trust, and the Trustee could buy property for the child’s use.  The child would have the power to remove the Trustee for any reason, but then an independent successor Trustee would have to be appointed.  When a child reaches a certain age, the child can become the Co-Trustee.  The Trustee would have to file a separate income tax return (Form 1041) to report income earned by this trust, unless certain provisions are added to make it a grantor trust under the tax law.  Although an Asset Protection Trust is more cumbersome, it can protect the property and keep it in the family.  

Which is the best way to give to your children?  It all depends.  Make an appointment with an experienced estate planning attorney to discuss how to leave your estate to your children.