Trusts

A trust is another way to leave your estate to your beneficiaries. A trust is a fiduciary (financial) relationship in which you, as the trustmaker or creator (called the “grantor” or “settlor“), give a trustee, who could be you or another person, the right to hold title to and manage your property or assets for the benefit of a third party, the beneficiaries (those who may benefit under the trust).

  • The Trust Agreement is the document that sets up a trust (aka, Deed of Trust, Declaration of Trust, or a Trust Deed). Paperwork varies by state.
  • Like a will, trusts are established to provide legal protection for your assets and to make sure they are distributed according to your wishes.
  • In this case, you are creating a trust to transfer your wealth to family members after your death with the option of including specific wishes about how they are distributed and giving specific privileges to the beneficiaries.
  • Assets that already name a beneficiary will go directly to them after your death and do not need to be added to the trust to protect them further.
  • After the trust is set up, you must re-register any property and securities added in the name of the trust. This means getting a new deed or other corresponding document for the asset.
  • Often there is an appointor who has the power to remove and nominate new trustees. This will usually happen when a trustee passes away or becomes unable to manage the trust.
  • You should include protocols for determining your state-of-mind or other types of incapacity without a court proceeding.
  • Trusts can substitute powers of attorney for the management of assets, but it is still best to name one for other legal issues that may come up.
  • You need to sign your trust in front of a notary public and/or witnesses.
  • Depending on the trust, you may need to file it with the state like you would a will. Check the rules for your state.

Trusts primarily benefit those who are very wealthy and are trying to avoid federal estate taxes. The 99.9% who are less wealthy do not have to worry about federal estate taxes.

Thirteen states have estate taxes that apply to a greater percentage of the population in that state.

In 2020 you can protect up to $11,580,000 from federal estate taxes. This will increase to $11,700,000 in 2021 and continue to increase to keep pace with inflation until 2025.

For those who are not wealthy enough to be concerned with these limits, there may be other reasons to consider a trust.

  • A trust can protect assets from step-parents or even the beneficiary.
  • Trusts allow you to transfer your estate to your family without going through the probate process. 
    • Trusts can protect your estate from creditors, certain taxes, and becoming public knowledge.
    • The probate court continues to oversee any trusts created in a will to make sure it is being handled properly until it expires.
  • In many cases trusts can save time and reduce paperwork.
  • A trust is usually more detailed and can be more specific about how you want your assets distributed and used. This may reduce challenges to your estate after your death.
  • To save on taxes, if you live in a state with its own estate tax.
    • There are 13 states that have additional estate taxes which can range from $1,000,000-$7,100,000.
    • These limits make trusts useful for many more people in these states especially since some states tax on the entire estate if you are over the limit, not just the amount over the limit like the federal tax. 

Guide to Understanding Trusts

It can be difficult to keep the various trust options straight. There are a number of ways to look at and compare the different trust choices to help you determine which is best for your situation. 

One confusing aspect of trusts is that the name chosen for your trust does not necessarily describe the features and may be an abbreviated version. For example:

  • A revocable trust living trust may be called a revocable trust since testamentary trusts are not revocable and adding ‘living’ is redundant; and
  • A trust termed a family trust could be one of many types of trust such as living trust, joint tenancy revocable trust, or testamentary trust, depending on the habits of your estate planner.

Some options presented as types of trust are frequently a combination of the features that you chose for your trust.

Do you want the trust to be created and begin to be managed before your death (living trust) or outlined in your will to be created after your death (testamentary trust)?

Are you able to fund it (funded trust) or not (unfunded trust)? A trust is useful unless funded.

If you create a living trust and can fund it, you have three choices to make.

  1. Do you want to be able to make changes to or close the trust after it is formed (revocable trust) or not be able to close or change the trust (irrevocable trust)?
    1. Other features of a revocable living trust:
      1. You and your revocable trust share the same Social Security number, which is what prompts estate tax.
      2. The trust’s income and deductions are reported on your personal Form 1040 tax return, as they would if you continued to own the assets personally.
      3. Trust assets are available to creditors while you are the trustee.
    2. Other features of an irrevocable living trust:
      1. Your irrevocable trust will have its own Social Security number.
      2. The trust’s income and deductions are reported on a Schedule K-1 (Form 1041).
      3. Trust assets are protected from creditors even while you are alive.
      4. Trust assets are not subject to estate tax after your death.
  2. Would you like to manage the trust initially after designating a successor trustee if something happens to you, or appoint another trustee to manage the trust during your lifetime?
    1. A revocable trust is generally initially managed by you and all irrevocable trusts are managed by another trustee.
    2. You may have a co-trustee.

Should you give your trustee emergency power to alter the trust (“Power to Amend Revocable Living Trust Agreement” or a Testamentary Power of Appointment) if needed or not allow it, even at your request?

Do you want your adult beneficiaries to have control of the assets right after you die or have them managed by a trustee (Discretionary Trust) until they are truly capable of doing so?

Are you leaving any of your estate to minor children with a trust that exists through the death of your surviving partner (Credit Shelter Trust) or onlyjust until they come of age?

Do you want to lock in what each minor beneficiary gets with an individual trust or group them together in a Group or Pot Trust to allow the flexibility to adapt to individual needs?

Do you have dependents with disabilities that will need a Special Needs Trust?

Here are a few details that may help simplify things.

If you create a trust, unless otherwise specified only you can change it. Therefore:

  • Living trusts are usually revocable before your death and irrevocable afterwards;
  • Testamentary trusts are irrevocable as they are formed after your death; and
  • If you want to give the trustee the right to alter the trust, you must specifically state such in the trust document or your will.

Minor children must have a trustee to manage the trust until they are of legal age.

Discretionary trusts only apply to adult beneficiaries.

Special needs trusts are only appropriate for disabled beneficiaries.

A family trust is merely a description of any trust going exclusively to family (related by blood, marriage, or law [in the case of adoption]) and not a type of trust.

Whatever the type of trust or name given to it, your trust is the sum of all the terms, provisions, and other features it contains. Instead of trying to determine what type of trust you want, determine what features you want the trust or trusts to have.

It may be best to think of creating a trust like going through a menu. For example, if you are creating a trust because you are ill and have two adult children with their own children, who are approaching college age, and a disabled spouse, you will be creating a Family Trust since only relatives are included.

Trust Menu

Choices Before Your Death

Choose One Feature From Each Row

Reason for Choice

☑ Living trust,

𝥷 Testamentary trust 

You opt for a living trust so you can transfer some assets to your children now, avoid some estate tax later, and protect your assets from creditors. Testamentary trusts created in a will are subject to the probate process.

☑ Individual trust

𝥷 Joint trust

You choose not to include your spouse as a trustee due to their disability and create an individual trust.

𐄂 Owner as trustee

☑ Other trustee

You choose another trustee since you may soon be too ill to manage it yourself and further protect assets from creditors.

𐄂 Revocable by you

☑ Irrevocable by you & other trustee

𐄂 Emergency trustee adjustment clause

You make it irrevocable in case your judgement becomes impaired from illness. You do not include any clause allowing the trustee to make changes, so they can’t be influenced by you. If you do not name yourself as trustee, this will protect the assets from creditors and lawsuits.

Choices After Your Death

Choose All Features That Apply

Reason for Choice

☑ Simple trust

𐄂 Discretionary Trust

𐄂 Pot Trust

You can use a simple trust; a Discretionary Trust is not needed since your children are very capable of being trustees. Your children are over 25 years old and have similar needs so can split the inheritance evenly without the need for a Pot Trust.

☑ Special Needs Trust

To provide for your wife’s care and allow her to continue to get Medicare.

𐄂 Credit shelter trust

☑ By-pass trust

Your spouse will be provided for by their Special Needs Trust so your remaining estate can go directly to your children.

☑Generation skipping trust

    ☑ Indirect

    𐄂 Direct

You choose an indirect trust that allows your children to benefit from the trust, but have it eventually go to your grandchildren.

 

  • The last things to consider are time, cost, and results.

  • Living trusts are more complicated than wills, need more planning, documentation, and up-front costs. However, the tax savings and avoiding an expensive probate process may make it worthwhile if your estate is large enough although it is likely to require a professional.
  • Testamentary trusts may be more complex and expensive, but they allow for more detail, clarity, and control of your assets after you die. A testamentary trust created in your will is overseen by the probate court while one created in a living trust is not.
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