A trust is a tool that is frequently used for purposes of estate planning. Through a trust, a third party (the trustee) is authorized to hold and manage assets on behalf of one or more beneficiaries. The person who creates the trust can include provisions within the trust that govern how trust assets are to be managed and used, and when assets may be distributed to beneficiaries of the trust.
- Your trust holds assets that are subsequently managed and distributed in accord with the terms you set forth in your trust.
- You choose the person who will manage the trust's assets, the trustee.
Trusts provide a number of potential estate planning advantages:
Flexibility: As you define the terms of your trust, and you can control how and when your heirs receive their inheritances. You may provide for the professional management of your assets, and make gifts to your heirs through installments, over a number of years.
Privacy: Trusts are administered outside of probate court, meaning that in the absence of a dispute that results in litigation over the trust's terms or administration, the terms of the trust don't become part of a public probate court record.
Disability Planning: You may use a trust as part of a plan for your own disability, creating a trust that you manage until you become incapacitated, but allows a person of your choice to manage the assets held in trust until you either recover from your incapacity or pass away. A trustee may immediately act to manage or take control of assets held in trust, without the need to go to court for additional authority.
Disabled Family Members: A will may also provide for the management of assets on behalf of a disabled surviving spouse or child.
Gifts to Children: A trust may provide for the management of children's inheritances during their minority, with appropriate disbursements being made for their care and support. It may also provide for adult children to receive their inheritances over time or in installments, rather than as a lump sum upon reaching the age of eighteen.
Tax Avoidance: For large estates, trusts may also be an effective tool for reducing taxes owed by your estate. Although the most common trust, the revocable living trust, does not avoid estate taxes, those with multi-million dollar estates may consider other forms of trust and estate planning tools that may provide a tax benefit.
A trust is not a complete solution for disability planning, and your estate plan should also include a durable power of attorney for healthcare (healthcare proxy), designating somebody who will make medical decisions on your behalf in the event that you become incapacitated.
Although a trust may allow you to avoid or reduce costs associated with probate, particularly for large estates or where the estate includes assets in more than one jurisdiction, that is not always the case. For some estates, the cost of setting up the trust, transferring assets into the trust, and the annual costs associated with continuing the trust may be greater than the savings associated with probate avoidance.
Business Assets and Trusts
If you are a small business owner and are creating a succession plan for your business, a trust may be an effective tool for both incapacity planning and for conveying your business to your heirs. If your controlling interest in your business is held in trust, you may designate a trustee who is authorized to take control of the business immediately upon your incapacity.
As the trust bypasses probate, your business won't have to wait for weeks, and potentially for months, before a court approves a successor to manage the assets and affairs of your business.
Although most people own assets that are located within a single state, some people own assets such as a vacation home that are situated in other states. A probate court's jurisdiction ends at the state line, and it thus may be necessary to start additional probate proceedings in other states in order to address assets held or titled in those other states. The out-of-state probate proceedings are known as ancillary proceedings.
If out-of-state assets are held in trust, the assets may be transferred by the trustee pursuant to the terms of the trust without the need to go to probate court. The use of a trust thus allows the estate to avoid the often-significant expense of ancillary proceedings to address the inheritance of out-of-state assets.
Why You Also Need a Will
A will is an estate planning document that defines how you want your assets to pass to your heirs when you pass away. A trust is a more complicated instrument that can potentially be funded during your lifetime or when you pass away, and may contain provisions that control the management and distribution of your assets over many years.
A will may potentially include provisions that cannot be included in a trust, or that would be far less effective if only included in a trust, including provisions that:
- Designate of a preferred guardian for minor children;
- Distribute of assets that remain in the deceased person's name;
- Attempt to limit the contest of probate proceedings by an heir;
- Describe your preferred funeral arrangements, and
- Address the inheritance rights of potentially unknown or accidentally omitted heirs; or
- Attempt to disinherit an heir.
A will may include a provision that creates and funds a new trust, called a testamentary trust. A will may also include a provision that transfers some or all of the estate's assets into an existing trust, in which case the will is known as a "pour-over will".
Upon review of their assets and estate planning goals, many people will find that they do not need a trust as part of their estate plan. However, every person should have a will, whether as their primary estate planning tool or as a back-up to their larger estate plan.
Even with the most elaborate of estate plans, it makes sense to draft a will as a back-up to trusts and other estate planning tools, in order to ensure that the estate plan includes all of your assets and that any assets that are not transferred into a trust during your lifetime are placed into the trust at the time your estate is probated. Your will may also designate from where any expenses or taxes are to be paid, in the event that your estate does not have sufficient assets to cover its expenses without contribution from trust assets.
Discussions of trusts include the following terms and concepts:
Beneficiary: A person or entity that will benefit from the assets held by your trust.
Grantor: The person who creates a trust. Also known as the settlor or trustor.
Grantor Trust: A trust that holds assets that, for tax purposes, are treated as if they remain part of the grantor's estate. The most common grantor trust is the revocable living trust.
Living Trust: A trust created during the grantor's lifetime. Also known as an inter vivos trust.
Pour-Over Will: A will that transfers some or all of the assets of a probate estate into an existing trust.
Testamentary Trust: A trust that is created and is funded from estate assets pursuant to the terms of a will, when the will is probated.
Trust Corpus: The assets held by the trust.
Trustee: The person you designate to manage the trust's assets and to carry out its directives.
Revocable vs. Irrevocable Trusts
A trust may be set up to be revocable or irrevocable:
Revocable Trust: The grantor retains control over the trust and its assets, and may amend or revoke the trust at any time.
Irrevocable Trust: Once the trust is created and funded, the grantor has no power to revoke or amend the trust or to remove assets from the trust.
Some forms of trust must be irrevocable in order to be legally effective.
The Revocable Living Trust
The most common trust used for estate planning purposes is the revocable living trust. A revocable living trust allows you to transfer assets in and out of your trust during your lifetime, but then becomes irrevocable upon your death or disability and directs the subsequent management and distribution of your assets. A revocable living trust is often included as part of a comprehensive estate planning package.
Many people are capable of drafting, executing and funding their own revocable living trust, but for more complex estates and estate planning issues it makes sense to consult an estate planning lawyer.
Other Common Trusts
Other types of trust may also be useful for estate planning purposes. Other common forms of trust include:
Marital Trust: A trust that holds assets of one spouse that are transferred to the surviving spouse upon death. Among other possibilities,
A marital trust may be a credit shelter trust, implemented to help couples with very large estates avoid estate taxes.
The trust may be a qualified terminable interest property (QTIP) trust that provides for a surviving spouse to benefit from certain property, and later conveys that property to other beneficiaries (such as the children from a prior marriage, following the death of the surviving spouse).
Charitable Trust: A number of trusts exist that provide for the support of charities during the grantor's lifetime or after death, and which may create tax advantages or a source of lifetime income for the grantor.
Irrevocable Life Insurance Trust (ILIT): A trust may be created to receive the proceeds of a life insurance policy and, if properly constructed, keep the proceeds from being included in the grantor's estate. This type of trust may be useful for business owners who want to ensure that the business has sufficient assets to cover its liabilities in the event of their death.
Spendthrift Trust: A spendthrift trust includes provisions that prevent a beneficiary from encumbering the trust's assets, prevent the beneficiary's creditors from making claims against the trust assets to cover the beneficiary's debts, and limit or prevent the ability of a court to consider the trust in relation to the division of the marital estate the event that a beneficiary divorces.
Crummey Trust: A trust that allows you to make gifts to your heirs during your lifetime that accumulate in the trust for distribution at a later date.
Qualified Personal Residence Trust (QTIP): A form of irrevocable trust that, if properly executed, may allow for the exclusion of your home or vacation property from your estate.
Special Needs Trust: A trust that contains assets that are used to help support a disabled beneficiary who receives public assistance, without jeopardizing the continued receipt of public assistance.
Although many people are capable of creating and funding their own revocable living trust, most other trusts should be created with the assistance of an estate planning lawyer.
Some trusts are very difficult to properly create and fund, or impose significant restrictions on the future use of the trust's assets. An estate planning lawyer may also be able to identify alternative, less cumbersome estate planning tools that better accomplish your goals or can be implemented with greater flexibility or at a lower cost.