Trusts: What is One and How do They Work?
Estate planning is an integral part of planning for seniors. There are many different forms of estate planning and various tools available to use. One estate planning tool that can be helpful for many seniors is a trust. They can serve many different purposes and are a great estate planning tool, regardless of your estate’s size.
What is a Trust?
Typically, trusts serve as a vehicle for managing property and other assets. The creator of a trust is called the grantor of the trust. The grantor transfers the assets and property to someone they have chosen to serve. This person is called the trustee of the trust. A trustee is responsible for managing the assets and property held in the trust for others’ benefit—known as the beneficiaries.
When is it a Good Idea to Create a Trust?
You can get started with your estate planning at any time in life, and the sooner, the better. Life is unpredictable. Making sure your assets and property are protected and distributed according to your wishes can be extremely useful.
One significant advantage of placing your property or assets within a trust is that this portion of your estate will not need to pass through a court process called probate.
Probate is the court process of proving a will. Probate can be a lengthy and expensive process, not to mention difficult for your loved ones to manage while grieving. All assets that are held in a trust do not need to go through probate. Typically this makes the distribution process go more smoothly and will save money in the end.
Another benefit is that your financial information and details of the assets and property held within the document remain private. The probate proceedings are public record, so any distributions of your assets and property will be public knowledge. While this may not seem like a big deal, it is not unusual for family members to have hurt feelings or arguments during this process. Using a trust can help spare your loved ones from confusion, anger, and hurt feelings.
The Two Different Types – Revocable vs. Irrevocable
There are a few different types of trusts that you can choose from during your estate planning. The different kinds fall within two main categories—revocable trusts and irrevocable trusts.
Revocable trusts are also known as living trusts. Trusts within this category can be modified, changed, amended, or even revoked or canceled.
The other category of trusts includes irrevocable trusts. Irrevocable trusts cannot be modified or canceled down the road if your plans change.
Benefits: Revocable vs. Irrevocable
Revocable trusts are more flexible than irrevocable trusts. However, there are some significant benefits to both. When deciding on which one to create, you should keep in mind the benefits and drawbacks of each. Weighing the pros and cons is important to make the best decision for you and your family.
You have the ability to manage a revocable trust, also known as living trusts, throughout your life. You can choose yourself as the trustee, as long as you name a successor trustee to take over these duties in the event of your passing. This type of trust can be a good option if you want to continue managing these assets.
An irrevocable trust may be worth considering if you have or anticipate having significant debt. Creditors and debtors can come after your assets and property held within a revocable trust. However, they cannot do that with an irrevocable trust if you relinquish legal title to the property and the assets.
Since there are benefits to each type of legal document, you will need to consider your financial needs and goals to make the best decision for you and your family.
Other Types to Consider
In addition to the two primary categories that trusts fall under, other types are useful under certain circumstances. These different types include special needs and spendthrift trusts.
Special Needs Trusts
A special needs trust can be created for any person who has a disability, even if they are currently eligible for government benefits. This document explicitly allows the person with the disability to remain eligible for government benefits.
There are also limitations to a special needs trust. With a special needs trust, the disabled beneficiary cannot control the frequency or trust distributions. The beneficiary also cannot revoke the trust.
Another specialized type of trust appropriate under certain circumstances is called a spendthrift trust. This type of trust carries some restrictions. One restriction is that a beneficiary is not able to sell any part of their interest in the trust.
In a spendthrift trust, the assets are protected from the beneficiary’s creditors until the assets or property of the trust has been distributed and given to the beneficiary. A spendthrift trust is useful if you have concerns that one or more of your chosen beneficiaries to your estate might squander the trust assets. Spendthrift trusts are also useful to protect beneficiaries who have a massive debt since the trust assets are protected from creditors.
What Should You Have Before Setting Up a Trust?
Now that you have an understanding of what a trust is and how you may want to use one to meet your estate planning needs, it can also be helpful to learn what you should bring with you when you meet with your estate planning attorney to formally create a trust. Before you meet with your attorney, it can save some time and energy if you have previously decided on what type of trust you want to go with and whether you want the trust to be revocable or irrevocable.
Gather Information Regarding Trust Assets
It is also useful to collect and review any details of the property or assets that you want to have included in your trust. You will want to ensure that the financial information and other details of these items are up to date. It may also help to bring any documentation related to the property or assets.
Choose a Trustee and Your Beneficiaries
Another thing to think about before formalizing a trust is to decide who you want to name as the trustee of the trust. Keep in mind that the trustee has many different responsibilities and must manage the trust assets and property. Hence, it is vital to choose a trustee whom you trust to handle these duties successfully. You likely already know who you want to name as your beneficiaries for your estate plans. Still, if you have not made any final decisions on that yet, it is good to do so before you meet with your estate planning lawyer.
A Plan for How the Trust Property and Assets Should Be Handled
It can also help to have a basic plan in place for how you would like the trust assets to be managed and invested. Your plan can include the distributions’ timing and the types of distributions from the trust. You may also want to consider the length of time that you wish the trust to be in effect before the termination of the trust, as well as what conditions must occur for the trust to be completed or discontinue operating.
Scheduling a Meeting with an Estate Planning Attorney
When you are ready to establish your trust, an attorney experienced in estate planning can help you finalize your trust and other estate plans. Since state laws regarding estate planning specifics vary from state to state, you will want to find an attorney local. A local attorney who practices this area will understand the state laws and the federal laws and how they may apply to your estate plans.
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