What is a Trust?
A trust is a legal relationship between the grantor (or trustor) and the trustee where assets (stock, money, real estate) are kept by one party for the benefit of the other. For the trust to exist, the trust must be created, and the trustee must agree to hold the property or money for the trustor in what is collectively known as the “trust fund.” Additionally, there must be beneficiaries or individuals who will benefit from the trust, for instance, children or grandchildren.
A trustee can be one person or a public body or company whose legal fiduciary duties of the trust are outlined by law. There can be more than one trustee and beneficiary of the trust.
Estate planning lawyers are generally hired to create trust documents and to ensure that the ownership documents of the assets reflect they are contained within the trust.
- Special Needs Trust
A special needs trust may be established for an individual who has a severe mental or physical health condition and who is currently receiving governmental aid (Supplemental Security Income or Medicaid) and is not allowed resources or income above a specified level. This type of trust may allow the beneficiary to maintain their governmental benefits while receiving certain payments from the trust for luxury items.
- Living Trust
A living trust is a trust created while the trustor or grantor is alive (contrasted to a testamentary trust) and allows the grantor the flexibility to modify, revoke or change the trust when desired.
- Charitable Trust
A charitable trust or public trust is established for some type of social benefit. This type of trust must fulfill certain requirements outlined by law. It must include trust property, and it must have a clearly stated charitable purpose for a specifically identified beneficiaries. In some cases the charitable trust can be used to avoid certain types of gift or federal estate taxes.
- Irrevocable Trust
An irrevocable trust is one that cannot be revoked or modified after it has been created (except under certain conditions). Testamentary trusts are often viewed as irrevocable, although there are a few exceptions which allow a testamentary trust to be changed. For instance, if the trust cannot meet the goal of the trustor or the beneficiaries agree to terminate the trust early by consent. Although, if the trust is a spendthrift trust, it cannot be terminated if it still has what is legally termed a “material purpose” such as continuing to support the beneficiary.
- Spendthrift Trust
A spendthrift trust allows the trustor to create a trust for a beneficiary which is overseen or managed by a trustee who controls the assets after the trustor’s death. The trustee has the authority to allocate payments to the beneficiary according to the trust agreement. This type of trust is commonly used to ensure that a beneficiary does not pledge or sell their interests from the trust to creditors and keeps the assets of the trust secure.
- Credit Shelter Trusts (By-Pass Trust)
A credit shelter trust protects married couples who own large estates from taxes after one spouse dies prior to the other. To accomplish this, after the death of one spouse, some of the property is automatically moved to the trust to shelter it from federal estate taxes. The transferred assets may not be subject to estate taxes upon the death of the second spouse but may be transferred estate tax free to the beneficiaries of the estate. The surviving spouse may also be entitled to use the income generated from the trust, but generally is not allowed access to the principal, although under some arrangements the trustee may be able to give the surviving spouse limited access.
Given the complexity and cost of creating a trust, most people do not create a trust unless they have a certain amount of assets, they wish to minimize estate taxes, they need to limit access of their assets from either creditors or lawsuits or they have strong ideas about how they want their assets distributed to their beneficiaries.
Unlike a will, a trust will generally allow beneficiaries to avoid probate (which is the process for paying the trustor’s debts and distributing their assets following their death). Trusts are generally less likely to be contested than a will and will not become public. Trusts can also allow for the flexibility that many families need to distribute their assets, especially if they have multiple marriages or several children from separate marriages.
Trusts also allow a trustor’s assets to be distributed over a period of time, rather than immediately following the trustor’s death. For example, if you have a child who is disabled or a child without the self-discipline to manage their own money, a trust will allow you to determine how your assets will be distributed. Trusts will allow the trustee to make monthly payment arrangements, either indefinitely, or until the child reaches a mature age. Trusts can also be established to reduce estate tax expense.
Creating a trust can be more complicated than a will and most likely will necessitate hiring an estate lawyer, adding additional cost to your estate planning. Analysis should be done to determine whether a will is sufficient for your estate planning needs and the full cost of probate (lawyer’s fees, court costs and estimated taxes). Keep in mind, if your trust is not established properly, it could be costly or time-consuming for your beneficiaries.
Given the number of trusts available, their flexibility and their complexity, hiring an estate planning lawyer is generally a good idea. Estate attorneys can outline applicable state laws and make sure that all of your property is transferred to the trust appropriately when you die so your heirs can avoid probate.
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