Trusts 101 with an Estate Planning Attorney
Trusts are a versatile tools that are commonly used to complete estate planning strategies. Trusts can be complex, so I thought it would be appropriate to explain what they are and how they can be used. I am not an estate planning attorney so I asked my wife, Katie Clemm of Clemm & Associates, LLC, who is an estate planning attorney to help me write this post to be sure you are getting the most accurate information possible.
What is a trust?
A trust is a legal entity created for many different purposes. Common reasons could be protection from creditors, avoiding going through court to distribute assets, and assigning a trustee/fiduciary to manage the trust assets and fulfill your wishes.
Trusts allow the grantor or settlor to make their intentions known regarding how the assets within the trust should be used. For example, if the grantor is worried their children will spend their inheritance quickly due to immaturity or some other issue, the grantor can create rules regarding how assets may be used and/or distributed that the trustee must follow when distributing assets from the trust.
A trust is a legal arrangement in which one party, known as the "trustee," holds property or assets on behalf of another party, known as the "beneficiary." The trustee manages the property or assets in accordance with the terms of the trust, which are set out in a legal document known as the "deed of trust."
Trusts are often used for estate planning purposes, as they can be an effective way to manage and distribute assets after someone passes away. They can also be used for charitable purposes, to provide for the care of a loved one with special needs, or to protect assets from creditors.
Trusts are governed by complex laws and regulations, and the specific terms of a trust can vary widely depending on the needs and goals of the parties involved. It is important to consult with a qualified attorney or financial advisor when considering setting up a trust.
What kind of trusts can be used?
There are many different types of trusts, each with its own specific purpose and characteristics. Here are some of the most common types of trusts:
Revocable living trust: A trust created during the lifetime of the grantor that can be amended or revoked at any time. It is often used for estate planning purposes, including avoiding probate and providing for the management of assets in the event of incapacity.
Irrevocable trust: A trust that cannot be amended or revoked once it is created. It is often used for asset protection, estate planning, and tax planning purposes.
Testamentary trust: A trust that is created under a will and only comes into existence after the grantor's death. It can be used for a variety of purposes, including providing for minor children, protecting assets, and minimizing taxes.
Special needs trust: A trust designed to provide for the needs of a beneficiary with a disability without disqualifying them from government benefits.
Charitable trust: A trust created for the purpose of supporting a charitable organization or cause.
Spendthrift trust: A trust designed to protect assets from creditors or other parties by limiting a beneficiary's access to the trust assets.
Asset protection trust: A trust designed to protect assets from potential creditors or legal action.
Life insurance trust: A trust designed to hold a life insurance policy for the benefit of the beneficiaries, providing tax benefits and potentially avoiding probate.
Generation-skipping trust: A trust designed to transfer assets to grandchildren or other beneficiaries who are at least two generations younger than the grantor, while minimizing taxes.
These are just a few examples of the many types of trusts available. The specific type of trust that is right for you will depend on your individual circumstances and goals.
Advantages of using a trust:
There are several advantages to using trusts as part of an estate plan:
Probate avoidance: In certain circumstances, assets held in a trust do not have to go through probate, which can be a time-consuming and expensive process, potentially saving beneficiaries money and hassle.
Control over distribution: Trusts allow you to control the distribution of assets to beneficiaries after your death, including when and how much they receive.
Asset protection: Trusts can be used to protect assets from creditors or lawsuits, which may be especially important for individuals with high-risk professions or business ventures.
Privacy: Trusts can be private documents, so the details of the trust and its distribution are not always public information.
Tax benefits: Depending on the type of trust and the assets held within it, there may be tax benefits, such as avoiding or minimizing estate taxes or reducing income taxes.
Special needs planning: Trusts can be used to provide for a loved one with special needs, without disqualifying them from government benefits.
Charitable giving: Trusts can be used for charitable purposes, allowing you to support a cause or organization that is important to you while also potentially reducing taxes.
Overall, trusts can be a valuable tool for managing and protecting assets, providing for loved ones, and achieving a range of financial goals. However, the specific advantages will depend on your individual circumstances and the type of trust you choose.
Disadvantages of trusts:
While trusts can offer many advantages, there are also several potential disadvantages to consider:
Complexity: Trusts can be complex to set up and manage.
Loss of control: When you transfer assets into a trust, you give up some degree of control over them, as the trustee assumes responsibility for managing the trust assets.
Limited flexibility: The terms of a trust are set out in the deed of trust and cannot be changed without the agreement of all parties involved and/or court intervention, which can limit flexibility in certain situations.
Potential for disputes: Trusts can be a source of family disputes if beneficiaries disagree with the trustee's decisions or if there is ambiguity in the trust deed.
Tax implications: Trusts can have complex tax implications, and depending on the type of trust and the assets held within it, taxes can be higher than with other estate planning strategies.
Overall, while trusts can offer many benefits, they are not always the best option for every situation, and it is important to carefully consider the advantages and disadvantages before deciding to set up a trust.
Why not just use a will?
While a will can be an effective way to distribute your assets after your death, it has some limitations. Here are some reasons why you may also want to consider using a trust:
Probate: Assets held in a will must go through the probate process, which can be time-consuming and expensive. In contrast, in some circumstances, assets held in a trust can avoid probate altogether, potentially saving time and money.
Privacy: Wills are public documents that become part of the public record when they are filed with the court. Trusts, on the other hand, can be private documents that are not filed with the court, providing greater privacy for you and your beneficiaries.
Control: With a will, you can only dictate how your assets are distributed after your death. With a trust, you can also specify how your assets are managed while you are alive and potentially incapacitated, providing greater control over your financial affairs.
Asset protection: Trusts can provide asset protection benefits that a will cannot. For example, a trust can protect assets from creditors or lawsuits, potentially helping to preserve your wealth for your beneficiaries.
Special needs planning: If you have a loved one with special needs, a trust can be used to provide for their needs without disqualifying them from government benefits.
Tax planning: Depending on the type of trust and the assets held within it, there may be tax benefits that a will cannot provide, such as minimizing estate taxes or reducing income taxes.
While a will can be a valuable estate planning tool, it is important to consider your individual circumstances and goals to determine whether a trust may also be beneficial for you.
Who creates trusts?
Trusts are typically created by individuals, known as the grantor or settlor, who transfer assets to the trust. The grantor can create a trust during their lifetime, known as a living trust or inter-vivos trust, or through their will, known as a testamentary trust.
To create a trust, the grantor must create a trust agreement that outlines the terms and conditions of the trust, including the beneficiaries, the trustee, and the assets held in the trust. The trust agreement should also specify how the assets should be managed and distributed, and any other instructions or limitations that the grantor wishes to impose.
The trustee is responsible for managing the trust assets and distributing them to the beneficiaries according to the terms of the trust agreement. The trustee can be an individual, such as a family member or friend, or a professional trustee, such as a bank or trust company.
It is important to work with a qualified attorney or financial advisor to create a trust that meets your individual needs and goals. They can help you understand the different types of trusts available, the benefits and drawbacks of each, and develop an estate plan that meets your specific needs.
Fiduciary Mission
At Integritas Financial, we are committed to providing fee-only, fiduciary financial planning services that are tailored to the unique needs of young professionals, particularly millennials. Our experienced planners work with you to develop customized financial plans that address key areas such as estate planning, trusts and wills, retirement, workplace benefits, education funding, student debt, and buying a house.
We believe in transparent, client-focused service that puts your financial goals at the center of everything we do. As a fiduciary firm, we are dedicated to acting in your best interests, and we never sell products that charge commissions to clients.
Our goal is to help you achieve a stable and prosperous financial future by providing comprehensive financial planning services that are tailored to your individual needs. Whether you're just starting out in your career or you're already well-established, we can help you navigate the complexities of financial planning and create a roadmap for success.