One of the biggest misconceptions when it comes to trusts in Estate Planning is that trusts are only for older or wealthy individuals. That’s simply not true. Trusts in Estate Planning can be for practically everyone, not just the wealthy. Age, wealth, or marital status doesn’t matter much when it comes to Trusts and Estate Planning. Trusts are powerful tools that, when structured and managed correctly, can be a gamechanger when planning for your future.
Estate Planning: Trust Basics
What is a Trust?The main question people generally have is: What is a Trust? A Trust is a legal entity created by one party (the Grantor or Settlor) that gives another party (the Trustee) the authority to manage assets for the benefit of someone else (the Beneficiary). This relationship is called a fiduciary relationship. A Trust is different from a Last Will & Testament, in that a Last Will & Testament is primarily used for the purpose of going through the court process of wrapping up your affairs and distributing your assets to your heirs after your death. A Last Will & Testament is only effective upon your death, and has no power or effect during your lifetime. While a Trust can also be used to wrap up your affairs and distribute your assets after your death, a Trust can have power and effect during your lifetime, and can be used for many different reasons to benefit yourself and others.
Why use a Trust in Estate Planning?
The next question usually asked is: Why would someone use a Trust in their Estate Plan? There are many different reasons to use a Trust in an Estate Plan.
Some of the most common reasons for using a Trust are:
- Management and distribution of your assets after you pass away for the benefit of your beneficiaries without needing to go through probate (the court process of handling your estate after you pass away);
- Management of your assets for your benefit if you become disabled or incapacitated;
- Management of assets and income for a disabled beneficiary without jeopardizing eligibility for government assistance;
- Tax planning;
- Charitable giving;
- Asset protection;
- and Long-term wealth planning.
What are the different types of Trusts frequently used in Estate Planning?
As there are many reasons why someone would use a Trust, there are many different kinds of Trusts. Following is a brief description of some of the most common Trusts used in estate plans:
A Living Trust, often referred to as an inter vivos or revocable trust, is created by the Grantor during the Grantor’s lifetime. A Living Trust places the management of the Grantor’s assets in the hands of a Trustee, and often, the Grantor of a Living Trust also serves as the Trustee. The Living Trust is essentially just an extension of the Grantor and is frequently not treated as its own separate entity. However, the management of the Living Trust and its assets is primarily for the benefit of the future beneficiaries of the trust once the Grantor passes away.
Living Trusts are the most common type of trusts used in estate planning. Living trusts are used for many different reasons, and frequently for multiple purposes within the same trust. A Living Trust also will usually convert into or create a different type of trust or trusts upon the death of the Grantor.
One of the primary purposes for using a Living Trust is to avoid the need for probate upon the death of the Grantor. As long as the Living Trust has been created properly, and all assets have been appropriately titled in the name of the Living Trust or otherwise are coordinated with the trust, probate may be entirely avoided.
A Living Trust can also be used during your lifetime if you become incapacitated or disabled and can no longer make your own decisions. A correctly structured Living Trust can authorize a Trustee to manage the assets titled in the name of the Trust for your benefit.
Testamentary TrustA Testamentary Trust is a type of trust that is created from a person’s Last Will & Testament upon their death (called the Testator). This type of trust only comes into existence once the Testator passes away. It has no effect on the Testator’s assets during their lifetime, and offers no protection or benefits until the Testator passes away. Use of a Testamentary Trust also does not eliminate the need to go through the probate process after the Testator dies. As with a Living Trust, a Testamentary Trust may convert into or create a different type of trust or trusts, which can be used for many different purposes.
Irrevocable TrustAn Irrevocable Trust is just that – irrevocable, meaning that the trust cannot be changed or terminated except under specific circumstances. An Irrevocable Trust can also be created by a Grantor during their lifetime, or from a Living Trust or Testamentary Trust upon a specific event, such as the death of the Grantor. Irrevocable Trusts offer the most protection and benefits for things like asset protection, tax planning, charitable giving, special needs planning, privacy, and long-term wealth planning. To offer the most protection, an Irrevocable Trust will place the management of the trust in the hands of a Trustee who is not the same person or entity as the Grantor, and the Grantor or any Beneficiary has no control over the trust. This does not mean the Trustee can do whatever they want with the Trust and its assets. The Trustee has an obligation and duty to the Grantor and Beneficiary to properly manage the Trust according to the specific terms of the Trust and applicable law. If a Trustee violates this fiduciary duty, a Beneficiary can pursue court action to hold the Trustee accountable.
Special Needs TrustA Special Needs Trust is a type of trust that allows for the management of assets for the benefit of a disabled individual so that individual may still qualify for government benefits available to that person. These benefits are usually managed by the Social Security Administration. In order to qualify for these benefits, a person must have limited income and assets. A Special Needs Trust can allow a disabled person to benefit from their assets and income (often inherited assets), by placing the control and management of the assets and income in the hands of a Trustee. The Trustee can then use these assets and distribute income in specific ways that do not disqualify the Beneficiary from receiving government assistance. A Special Needs Trust can be created on its own, or through a Testamentary Trust or Living Trust.
Charitable TrustA Charitable Trust is a trust that manages assets for charitable purposes. A Charitable Trust can also provide tax benefits while generating income. Charitable trusts can be used to benefit individual beneficiaries, as well, so long as the Trust also produces income or assets that are donated to charitable organizations.
Estate Planning: Trust FAQ
How much does it cost to include a Trust in an Estate Plan?As with a lot of things having to do with estate planning, the answer to that question is: It depends. As each situation is different, and more complicated situations may require more complex trust planning, you should contact one of our knowledgeable attorneys at Navigate Law Group for more information on how much it may cost to include a Trust in your Estate Plan.
Is a Trust right for your Estate Plan?The question as to whether or not you should use a Trust in your own Estate Plan depends on your specific circumstances and goals. If you’re considering a Trust for your own Estate Plan, contact one of our attorneys at Navigate Law Group for more information.
Do you need an Estate Plan?Yes, you do. Estate Planning is not something that just the wealthy can benefit from, or something that only applies to people in their old age. Every person over the age of 18 should put together an Estate Plan, however simple or complex it may be. At a minimum, your Estate Plan should include a last will & testament, financial power of attorney and medical power of attorney. These documents allow people to handle your affairs after you pass away, or while you’re alive and may not be able to make your own decisions due to accident, illness, disability, or old age.
There may be other tools to include in your Estate Plan, such as a Trust. One of our estate planning attorneys at Navigate Law Group can help you determine what your Estate Plan should include to meet your specific goals and circumstances.
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Josi R. Howard
Estate Planning | Estate & Trust Administration
James C. Howe
Estate Planning | Estate & Trust Administration | Business Law | Real Estate
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Every legal issue is very unique. Accordingly, the information in this blog is intended as general education material and not as legal advice. If you think you may have a legal issue you should consult an attorney.