At its essence, a trust is essentially a contract that permits a third party, called the trustee, to hold assets on behalf of a beneficiary. The trustee has a fiduciary duty to the beneficiary, that is, the trustee must put the beneficiary’s needs first. The trust document is drafted to address issues like how and when assets pass to the beneficiaries, what conditions must be met for the beneficiaries to receive assets, etc.
Because trusts usually avoid probate if assets are owned by or aligned with the trust, the beneficiaries can get access to these assets more quickly than they might if the assets were transferred using a will. If it’s an irrevocable trust, it may not be considered part of the taxable estate, which means there will be fewer taxes due at your death.
FedWeek’s recent article, “The Basics of Trusts,” explains some of the benefits of having a trust in your estate plan. Trusts can offer the following:
- Protection for possible incompetency. You can form a trust and transfer your assets into it. You can be the trustee, and you’ll have control of the trust assets and keep the income. A successor trustee will assume control if you’re incapacitated.
- Avoiding probate. The assets held in trust avoid probate, which can be expensive and time-consuming. In the trust documents, you can direct the trust and provide how the trust assets will be distributed at your death. The key to avoiding probate however, is not the fact that you have a trust, but that your assets have been retitled into the name of the trust. If assets are not retitled your assets will still be probated even though you have a trust.
- Protection for heirs. After death, a trustee can keep trust assets from being spent all at once or lost in a divorce with specific instructions in the trust document.
A trust can be revocable or irrevocable. A revocable trust has to be created during your lifetime. If you change your mind, you can cancel the trust and reclaim the assets. With a revocable trust you can enjoy incapacity protection and probate avoidance—but not tax reduction – unless you are a married couple and effectively use a credit shelter trust and marital trust planning.. In contrast, an irrevocable trust can be created while you’re alive or at your death (a revocable trust becomes irrevocable at your death).
Assets transferred to an irrevocable trust during your lifetime may be shielded from creditors and divorce settlements. The same is true for the assets put into an irrevocable trust at your death.
Your heirs can be the beneficiaries of an irrevocable trust. The trustee you’ve designated will be tasked with distributing funds to the beneficiaries. The trustee will be responsible for protecting trust assets.
At Family Estate Planning Law group, we find that all of our clients need at least basic Revocable Living Trusts, however to find out whether or not a different kind of trust is right for you explore our blog and visit our website today to schedule your consultation!
Reference: FedWeek (May 9, 2019) “The Basics of Trusts”