Over the years, many prospective clients have contacted me claiming that they needed a trust. After an initial planning meeting, many of those clients decided to include a trust in their estate plan, but some ultimately determined that they could accomplish their goals without a trust. Trusts have several uses that can be beneficial to clients and their families, but you might be asking “Do I need a trust?”
WHAT IS A TRUST?
A trust is a fiduciary agreement created by an individual (known as the “settlor” or “grantor”) that spells out how fiduciary (the “trustee”) is required to hold and administer assets for the benefit of people or charities (the “beneficiaries”). Some trusts hold assets during the settlor’s lifetime, while others receive assets upon the settlor’s death. Some trusts, typically those that are used in estate tax or asset protection planning situations, are irrevocable. This means that once they are signed they cannot be changed. Most trusts, however, are revocable and can be changed or terminated by the settlor at any time.
USING TRUSTS FOR YOUNG BENEFICIARIES
One important reason to have a trust is to provide for younger beneficiaries in a way that will not impair their development to becoming mature and responsible adults. If assets are left directly to young beneficiaries, they are typically able to have complete control over those assets once they attain age 18. Most people think this is too young for a beneficiary to have complete control over a significant inheritance. With a trust, however, a settlor can prevent a young beneficiary from having complete control over the inheritance until some point in the future, usually measured by the beneficiary attaining a specified age. Until that future date, however, the trustee typically has the discretion to pay the living expenses of the beneficiary, including health care and education expenses. In short, a trust can prevent a young adult from making unreasonable purchases or squandering an inheritance.
USING TRUSTS FOR CREDITOR PROTECTION
Creditor protection for beneficiaries is another important use of a trust. By placing certain restrictions on a beneficiary’s rights with respect to trust assets, those assets can be shielded from creditors in the event of creditor claims. If a trust beneficiary is in a profession that could lead to lawsuits or claims by creditors, trusts can prevent the beneficiary’s interest in the trust from being subjected to the claims of creditors. A trust can also prevent a beneficiary’s inheritance from being reached by a beneficiary’s ex-spouse in the event of a divorce and with proper planning could alleviate the need for a premarital agreement.
USING TRUSTS FOR DISABLED BENEFICIARIES
Another important use for a trust is to provide for a disabled beneficiary in a way that will not jeopardize her eligibility for governmental benefits. If a disabled beneficiary who is receiving governmental benefits inherits assets, it is possible that the inherited assets could disqualify the beneficiary from receiving the governmental benefits. Carefully drafted trusts, however, can enable a beneficiary to benefit from the trust assets without cutting off the governmental benefits.
USING TRUSTS FOR TAX AVOIDANCE
Trusts can be used to shelter assets from transfer tax in the future. Typically, assets left for a beneficiary would be included in that beneficiary’s taxable estate at her death, but a trust can be drafted to “shelter” those assets (and their appreciation) from transfer tax at a beneficiary’s death. This type of plan works really well if the inherited assets would be subjected to estate tax in the beneficiary’s estate and the goal is to reduce taxes in the future.
USING TRUSTS FOR PROBATE AVOIDANCE
Another common use for a trust is for probate avoidance. In recent blogs, I have written about probate (see “What is Probate?”) and probate avoidance (see “Why You Should Avoid Probate”). For many people avoiding probate is a major goal when implementing an estate plan. With a trust and properly-structured beneficiary designations, probate and the negatives associated with probate can be avoided.
I CAN HELP
Trusts are not for everyone or every situation, but for a little more cost up front, a trust can be a valuable and instrumental piece of your estate plan. If you would like to learn more about trusts or whether you need a trust, please do not hesitate to contact me.
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