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Creating a trust and selecting a trustee

One important aspect of estate planning is deciding whether or not to establish a trust. A trust can help not only with managing the assets of the estate, but can also reduce the impact of estate taxes and save beneficiaries from having to endure the probate process. Yet a trust can be a legally complicated instrument and before establishing one, it is important for residents in Maryland and elsewhere to understand the potential consequences of different types of trusts.

There are primarily two types of trusts: a living trust and a testamentary trust. A living trust is created during one's life, while a testamentary trust is created through one's will. Both can be used to avoid probate, but there are tax consequences associated with each depending upon not only how the trust is set up but also who is named as the trustee.

The trustee is the person who manages the trust for the benefit of the beneficiary. However, in a testamentary trust, if these two people are the same, then they may end up having to pay taxes to the IRS on the amount in the trust. Specifically, the trust's assets could be included in the gross estate of the beneficiary for the purposes of estate taxation.

Concerning a living trust, there are two types. In an irrevocable trust, it is often wise to appoint an independent trustee. On the other hand, a person will still have to pay income taxes on anything they set aside in a revocable living trust no matter who the trustee is. Nonetheless, selecting an independent trustee is often a good rule of thumb to follow no matter what kind of trust a Maryland resident intends to establish.

Source: Appleton Post Crescent, "Terrence Jack column: Pick estate trustee ahead of time," Terrence Jack, March 31, 2012

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