For centuries, trusts have been formed to provide safety and protection for valued assets. Recent changes in the law have made this old institution even more popular by reducing trust’s ongoing maintenance costs. You might think that only the very wealthy need the protection of a trust, but the truth is that a trust is a huge benefit to anyone having an asset in need of protection from their children’s creditors, divorce or from self-destructive beneficiaries.
Trusts are a legal arrangement where a person called a grantor or settlor signs a document called a trust, usually drafted by an estate planning attorney, which names another person or entity as trustee with the duty and responsibility to hold an asset for the benefit of a beneficiary. In most cases the grantor, trustee and beneficiary are three separate persons, but a trust can be formed where one person serves in all three positions. (see my article “Revocable Living Trusts”)
The trustee is typically an individual, attorney, bank or trust company. Deciding who would be best to serve as your trustee will depend on many factors, including your goals and concerns, the beneficiary’s age and abilities and the type of assets you will be using to fund the trust. Whoever you name as trustee will serve as a fiduciary, with duties and responsibilities to the beneficiary. Being a trustee is not necessarily a fun job and it comes with varied responsibilities. The trustee must manage the trust assets, communicate with the beneficiary, make sure tax returns are filed and that all relevant state and federal rules are followed.
Once and asset is transferred to the trust, the trust is the legal owner of the property deemed within it, just as if a person owned the property. For example, if you fund a trust with a house, the deed to the property will now name the trust as the owner, just as if you had sold the property to a third person. Future tax bills will name the trust as the owner and the trustee will be responsible to buy insurance, obtain utilities and to sign lease agreements.
A trust may be formed during the grantor’s life, in an inter vivos trust, or it can be a testamentary trust, formed within the terms of a will, coming into effect only after death.
A popular type of inter vivos trust, often referred to as a revocable living trust, is used to replace a will. The settlor retains the right to change or revoke the trust during lifetime, so even though the trust owns the legal right to property, the grantor can reclaim the property at any time. Another class of inter vivos trusts is irrevocable trusts, which generally do not allow the grantor the right to reclaim property once it is transferred into the trust. These trusts all serve different purposes within an estate plan, and they may serve the goals of one client perfectly, but be unsuitable for another client.
For example, if your chief concern is avoiding probate and have very little fear about creditors, and do not wish to give up control over your assets, a revocable living trust might be a perfect fit for you. This is especially true if you live in Manhattan or in Palm Beach, Florida, as probate fees are high in both New York and Florida. An irrevocable trust could also solve the issue of avoiding probate, but using an irrevocable trust also means giving up control over the asset. By consulting with an estate planning attorney you can weigh the pros and cons of both trusts and select the trust that serves your goals best.
In the alternative, if the settlor lives in Philadelphia or Cherry Hill, New Jersey, where probate fees are lower, a revocable living trust might be an unnecessary expense, but if that same person has concerns about future creditors, then forming and funding an irrevocable trust might be an excellent choice.
At one time trusts were tools that had significant ongoing costs, which limited them to the wealthy. This is no longer true. Changes to the tax code and to state laws allow trusts to provide significant asset protection with virtually no ongoing costs.
Depending on your situation, having a trust may provide you huge advantages. For example, no matter how little money you have, if you are a parent of a minor child your will should set up a testamentary trust to hold any inheritance that would otherwise pass to the minor child. Without a trust, a petition need be filed with the Orphans’ or Surrogates’ Court to appoint a trustee to manage the inheritance until the child reaches age 18. This is an unnecessary expense that may lead to expensive litigation and an outsider managing the funds for the child. A trust would also allow you the ability to select an age when the child would gain access to the funds, rather than the default age of 18.
The best way to determine if a trust can address your own unique situation and goals is to meet with an experienced estate-planning attorney. If you would like to know more, feel free to contact me for a free consultation.
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