A Trust is a legal means of transferring your assets to another individual who is called the trustee for the purpose of managing those assets for your beneficiaries and distributing them to your beneficiaries. If you wish, you can name yourself as the beneficiary.
As the person who sets up the Trust, you are the settlor of the Trust (sometimes referred to as the trustor of the Trust).
The Trust sets out specifically what your intentions are with respect to the disposition of your assets and gives the trustee specific powers to carry out your wishes.
A TESTAMENTARY Trust is established after your death through your will and is only established after probating the estate. Assets of a Testamentary Trust will first pass through probate and are considered part of your probate estate. This means that your beneficiaries might not receive income from the Trust until probate is completed.
A LIVING (INTER VIVOS) Trust is established during your lifetime and can be designed to terminate at a specific time or continue in effect after your death. A Living Trust allows you to avoid probate because the transfer of assets into the Trust occurs while you are alive.
Living Trusts may be REVOCABLE or IRREVOCABLE. The terms of a Revocable Trust may be changed at any time or canceled altogether.
There are numerous advantages to having a Living Trust. A properly funded Revocable Living Trust eliminates the necessity for a probate administration of the assets held by the Trust, thus avoiding the cost of filing fees, publication costs, appraisal fees, executor’s commissions and attorney fees, time delays from nine months to two years, and the publicity of a probate.
A Living Trust is much more than a probate avoidance tool. One of the most significant benefits of a Living Trust is preventing the necessity of a conservatorship proceeding in the event of incapacity of the trustor(s). A conservatorship is the legal proceeding brought for the purpose of acquiring authority to manage assets and/or make personal health care decisions on behalf of an incompetent person. With a Living Trust, a provision can be made which states that in the event the original trustee (normally the trustor) is no longer capable of acting as trustee, a successor trustee is authorized to take over management of the Trust assets for the benefit of the incompetent person. This provision, although not applicable to health care decision making, may entirely eliminate the necessity of a conservatorship for the estate of an incompetent person.
A trust can also be used to minimize estate taxes at death. For example, under current IRS regulations, a married couple before death can implement a Marital Tax Trust which may eliminate estate taxes entirely on a combined net estate valued at $7,000,000. With no tax planning, the executor of the surviving spouse’s estate in this example (assuming no increase or decrease in the value of the original combined estate) would have been obligated to pay over approximately $3,080,800 in estate taxes to the IRS! A Living Trust incorporating proper tax planning could eliminate this tax entirely.
An additional benefit to the Living Trust arrangement is the ability to control the distribution and management of assets even after death. For example, a Living Trust can be set up so as to provide for a beneficiary who has money management and/or debt-related problems by creating a “Spendthrift Trust.” Assets held in such a trust may not become subject to garnishment or seizure by the beneficiary’s creditors until actually placed in the hands of the beneficiary. Of special interest is a variation of this same type of trust which can be used to provide for a disabled child or other beneficiary who may be receiving public assistance benefits. This “special needs” type trust could, when properly drafted, prevent the termination of a disabled person’s benefits due to the receipt of an outright bequest of cash exceeding the resource limitations under SSI and/or Medi-Cal regulations.
ADVANTAGES OF A REVOCABLE TRUST
- Avoids time delay and costs of probate.
- Provides uninterrupted management of estate assets.
- Prevents possible conservatorship problems.
- Eliminates out-of-state probates.
- Keeps estates somewhat private.
There are some disadvantages to having a Living Trust. First, a Living Trust normally costs much more than a will. A typical Living Trust may cost upwards of $1000 to $3000, depending upon its complexity. Secondly, there is a certain amount of initial “hassle” in changing title of all of one’s assets to the name of the Trust. This process is commonly known as “funding” the trust and is crucial to the proper administration of the trust. Thirdly, because a Living Trust provides for avoidance of probate, there is no court supervision to insure the performance of the Trust terms. A Living Trust involves a substantial amount of trust and faith in the person one appoints to administer his estate in the event of his incompetency or death. Fourthly, while the probate process cuts off the right of a decedent’s creditors to claim payment from the estate 120 days after the hearing at which the personal representative is appointed, the creditors of a decedent whose assets are held in trust may have creditors’ rights that last substantially longer. This could pose problems for certain individuals.
A qualified estate planning attorney should be consulted before deciding whether a Living Trust is the proper estate planning vehicle for you.
~ Contributed by Wm. Peter Terhune, Esq.