Trusts: What are they and do I need one?
“I want to make it easy for my family” is something I often hear from my clients. A trust is one of the tools available to accomplish that goal.
In their simplest form, trusts are an estate planning tool that allow for management of your stuff while you are alive and after you pass. There are many different types of trusts with different purposes and functions. First, let’s talk about the players.
1. The Grantor or Settlor: this is the person who creates the trust.
2. The Trustee(s): this is the person or people in charge of the trust. This person follows the trust rules and makes sure everything goes according to plan. The Grantor or Settlor may also be a Trustee.
3. Beneficiaries: this is a person who benefits from the trust in some way. They can be a child, spouse, organization, institution, or any combination. At some time, a beneficiary will receive all or some property that was in the trust.
Now that we know the players, let’s talk about the parts of the trust.
1. Objectives: what do you want the trust to do? You can use the trust for a single goal or to accomplish many. Some trusts have very specific rules that must be followed, others are more flexible. You may want property distributed immediately, managed by the trust for a long time, or distributed when a certain event happens.
2. Trust Property: after you place property into a trust, that property is now known as trust property. How do you do this? A change in title. Example: instead of Jane Doe owning a bank account, the account is owned by Jane Doe, as Trustee of the Jane Doe Family Trust.
3. The Rules: the rules are your instructions for what is to be done with the trust property. Sometimes these rules look very similar to what you would see in a Will. As mentioned above, depending on your objectives and the type of trust used, the rules may be flexible or strictly follow state and federal law.
What are the advantages of a trust?
There are many advantages to having a properly set up and funded trust, below are some of the most common.
Probate Avoidance: Probate is typically required for assets that are held in your name alone at the time of your passing. This is where the importance of transferring assets to the trust comes into play. Trust property avoids probate. Trusts also avoid the probate costs of filing and inventory fees; save time by avoiding the wait for letters of authority or the appointment of guardians and conservators; allows for privacy as management is not supervised by the court; and reduces the chance of disputes.
Control: A trust may allow you to control property that is held by the trust long after you are gone. Sometimes it is not wise to leave an asset or amount of money to a child or individual outright. A trust allows you to manage the asset or money until the person is mature enough or able to manage the asset on their own. The more control you want, the more likely a trust is an appropriate tool for you.
Asset Protection: Trusts allow for the protection of assets from certain creditors and in certain situations. Trusts may be drafted to protect assets from future divorces, protect eligibility for a beneficiary’s governmental assistance, place limits on how much a beneficiary receives at a time, and more.
Tax Planning: certain trusts are helpful tools to maximize tax protection, defer taxation, take advantage of deductions, or remove assets from the taxable estate.
Disability planning: A trust offers the protection and control of a trustee. If something were to happen to you, the rules in the trust may allow a second trustee to manage the trust assets while you are not able to. The trust may also permit the trustee to manage the trust assets of a beneficiary who becomes disabled.
Cost: A trust based estate plan costs significantly more than a Will based estate plan.
Management: Trusts are complex and take work. A trust requires more effort at the beginning to re-title assets to the trust as well as the ongoing responsibility of the Trustee. The trustee may be managing assets or business interests for a long time, or deal with complex family issues. A corporate trustee may also be needed or involved. Also, depending on the type of trust and how long assets are managed, at the death of the settlor the trustee may be required file income tax for the trust.
Do I need a Trust?
That answer depends on your specific goals and needs. Schedule an appointment with an estate planning attorney to discuss your concerns and options.
Information in this blog post is not legal advice but general information. Contact an estate planning attorney to implement a plan for you.