The purpose of estate planning is to protect your assets and your heirs when you aren’t around to do so yourself. And one useful tool most people have available is a trust. But misconceptions about trusts abound. Many people have heard of trusts but actually know little about how they really work and how they can be used by just about anyone.
To help you decide if one or more trusts are right for your estate plan, here are some answers to your questions.
What Is a Trust?
First, what is a trust? Trusts are legal tools to own and control assets as a separate entity rather than as an individual. Because it’s not specifically tied to the person who set it up (the grantor), the trust can be managed by them or others, it can outlive the grantor, and it may protect assets from unnecessary taxation.
Trusts can be revocable — meaning they can be altered or revoked by the grantor — or irrevocable. Some trusts are general in nature and the trustee can use the funds in many ways. Others, like a pet trust or a business trust, specify that assets and income can only be used to care for the beneficiary.
How Do Trusts Work?
Trusts vary according to their purpose and the assets involved, but they follow a basic formula. First, specific assets are transferred into the trust by the grantor. This may be one asset, such as a piece of real estate, or many assets like bank accounts or collectibles. The grantor generally names themself as trustee and therefore continues to make decisions regarding the assets.
When the grantor and trustee passes away, the backup trustee they previously named takes over control of the trust and its assets. They must follow the rules of the trust as set up by the grantor. This may include when and how to dissolve the trust and specific rules about how assets must be used. The trust could go on forever, although many trusts are dissolved once their intended purpose is fulfilled.
Why Might You Use a Trust?
Trusts aren’t just for the wealthy and privileged. Trusts can be used by just about anyone for a variety of reasons — only some of which are financial. For example, a family might use it to protect assets for the care of a family member with special needs. Not only does the trust separate assets so as to avoid causing problems with governmental programs, but the family can also contribute and help manage care.
A trust also protects your privacy. While a will is public record in many states, a trust is much more private. This is a useful tool for those who want to protect their privacy, who inherit money and don’t want intrusive requests, or who may not want their home advertised to ex-spouses or others. And when you pass away, the trust is not part of your public will or estate.
Many people use trusts to avoid probate. Probate, the process of legally confirming a will through the courts, can take significant time and money. Because the trust is not the same as an individual’s assets, assets within it are not part of the estate. They do not need to pass to anyone upon your death, and a trustee already has the authority to manage them. Trusts ensure continuity of care no matter what happens to you.
What are the Challenges of a Trust?
Of course, any legal tool has both benefits and drawbacks. One of the most important parts of using a trust is setting it up right. The trust must follow state trust rules, including specific language, in order to be enforceable. Failure to write up an enforceable trust could cause even more problems than you were trying to solve. And, unfortunately, you may not realize it’s not legal until you or the beneficiary needs it most.
The grantor must also choose the right kind of trust. There are a range of trust types, and they have different rules and different benefits. In irrevocable trusts, for example, the income from assets are not taxed to the individual. But this is predicated upon the fact that the trust cannot be revoked and the grantor can’t take back the asset. But if you opt for a revocable trust, this tax benefit doesn’t apply.
Finally, you must transfer assets into the trust. For a trust with only one or two large assets, like real property, this could be a simple, one-time process. Other trusts require more transfers, sales, and other business transactions to maintain the right ownership.
Where Should You Start?
If you think that a trust might help you speed up the distribution of your estate, protect privacy, care for specific beneficiaries or properties, or reduce your taxes, start by meeting with an experienced trust and estate planning attorney in your state. Siben & Siben LLP can help. We provide a range of trust services for people with all types of goals. Call today to make an appointment or find more answers.