A trust is a legal instrument which creates a legal entity which will receive its own EIN (Similar to a SS Number) and may be required to pay its own taxes on its own income. It is a document that is generally drawn by a lawyer with very specific goals and with a beginning and ending premise. Generally there are two types of trust: first, irrevocable trust - this is a trust where you have placed the money and the trust now as its own legal entity has full and complete control of those funds and/ or assets. The settlor, who is the individual who creates the trust, cannot serve as the trustee and has absolutely no control over the asset. A second type of trust is a revocable trust which is where the settlor has contributed cash and/or property to a trust but remains either the trustee or remains with sufficient power to have control over the cash and/or property contained in the trust. It is important to distinguish these two types of trust because in an irrevocable trust the property is not owned by the individual at the time of the creation and funding of the trust and therefore is not a concern on the Federal Estate tax side or on the Pennsylvania Inheritance tax side. A revocable trust however wherein the settlor retains control may have significant impact both on the Federal Estate side and on the Pennsylvania Inheritance tax side. Therefore it is of the utmost importance that how the trust is created is a significant issue and must be addressed appropriately in the trust document. Lastly the trust must have an end. All legal entities have beginnings and ends, generally speaking, and the trust must have an end. Whether that is to be distributed upon a certain beneficiary reaching a certain age, or if no beneficiary reaches that age to then be given to some third party or to charity. However it ends there must be an end if the trust is going to be found to a valid trust.
For a number of years now certain industries have been touting the benefit of a "Living Trust". This is a revocable trust and therefore as stated above will be owned by the party at the time of his death. The difference between a Living Trust and a Will is a Will would be probated and therefore be made public, a Living Trust would not. A Living Trust would not require Probate in an out of state proceeding or property yet in another State. In a Living Trust the settlor will be able to manage the assets as long as he is willing and able to do so. Lastly in regards to costs, a Will needs to be probated and there will be administrative costs and legal fees for that probate. A Living Will however costs a significant amount of money to be drawn properly and may avoid some probate costs. It should be noted at this point that it will not avoid Inheritance Tax or the possibility of Pennsylvania or Federal Estate tax because it is a revocable trust and therefore owned and controlled by the decedent himself at the time of his death.
As stated above an irrevocable trust is a trust wherein the individual has divested himself of control and ownership over certain assets. These assets may be cash or property or may be life insurance policies. In the example stated above where the individual owned the $500,000 life insurance policy at the time, it would be included in Federal Estate Tax as an asset. That same policy may be purchased by the trust and be owned by the trust, although irrevocable, and not be taxable in the person’s estate. The basic principle behind trusts is to allow for the distribution of assets and minimize the liability for taxes, both under the Federal Estate Tax and the Pennsylvania Inheritance Tax.
Lastly what the author refers to as "Children’s Trust" is a trust set up for minor children and/or grandchildren in a Will, generally, but can be set up outside of the Will to have the individuals receive funds at a certain age, as a result of a certain act, or at the happening of a certain event. They are set up either in groups for all the children to be divided equally in individual ways, that being I could set up one trust for four children and give each one of the children one-quarter of trust as theirs; or I could set up four trusts with each child having an individual trust and allow the trusts to grow individually of themselves. The settlor, or the individual setting up the trust, can fund each trust as he or she sees fit, either individually or through his Will in a way of recognizing the difference in the status of the life of the individual parties. These types of trust generally end on a certain date or at a certain age of the child. They are generally not entitled to run the entire life of the child although there are certain generation skipping trusts that may well do that.