A trust is a legal instrument that sets the ownership of property and assets in the hands of another party, called a trustee. This third-party trustee has no control over your trust or its contents but has fiduciary obligations to act in your best interests when it comes to managing and using your assets. Trusts are widely used as estate planning tools and for other purposes. They may be revocable or irrevocable, depending on the circumstances. The following article covers what a trust is, how it can help you, what types of trusts there are and what you need to know if you are interested in creating one.
What Is a Trust?
As mentioned before, a trust is a legal instrument that sets the ownership of property and assets in the hands of another party. This third-party trustee has no control over your trust or its contents but has fiduciary obligations to act in your best interests when it comes to managing and using your assets. The trustee manages assets on behalf of another person (called a beneficiary). The trustee is responsible for managing assets according to the terms. The person who creates the trust (known as the trustor) decides how the assets will be managed during the term of the trust (also called the trust period) and who will manage them. A trust can be revocable or irrevocable. A revocable trust can be changed or revoked at any time during the trust period. An irrevocable trust cannot be changed or revoked.
Why Create a Trust?
Trusts are widely used as estate planning tools and for other reasons. We have broken it down into five reasons to create a trust, however, it may not work for all persons and that is why we feel it is important to discuss this matter with an estate lawyer or estate planner and your accountant.
5 Reasons to Create A Trust
- It Provides Security for Beneficiaries: A trust can provide security for beneficiaries by helping them avoid probate. Assets that are probated are subject to being claimed by creditors.
- It Provides for Retirement and Other Goals: A trust can be created to provide for your retirement, to provide for the education of your children or grandchildren, for the care of a loved one with a disability, or for other goals.
- It Helps Avoid Excessive Estate Taxes: Estates that are large enough to incur taxes can create trusts that help avoid or reduce estate taxes.
- It Helps Avoid Guardianship: A trust can help avoid guardianship for your minor children if you are no longer able to care for yourself.
- It Provides Advance Planning for Health Conditions: A trust can be created to provide for your loved ones if you are unable to take care of yourself.
Types of Trusts
- Revocable Living Trusts – A revocable living trust provides a way to avoid probate. To create one, you put your assets, such as bank accounts, real estate, stocks, and other property in the name of the trust. You keep control of the assets by controlling the trustee. A trustee can be yourself, another person, a bank, or a trust company.
- Special Needs Trusts – These are used when you have a family member who has special needs. Special needs trusts are created to help provide for the needs of special needs family members. Assets are not counted when determining Medicaid benefits.
- Irrevocable Trusts – Irrevocable trusts do not have an end date. They can be used for many different purposes.
- Charitable trusts – These are trusts that use the assets available to provide a public service. They are considered irrevocable.
When Creating a Trust is NOT the Right Step
We have already created a list of the 5 reasons you may want to create a trust, but we want to caution that this may not be those reasons may not be beneficial to you if you are in a state that has different laws. In this list, we will also review why some of the benefits may not be worth it.
Reasons why creating a trust may not be right for you:
- You have minor children: If you have minor children and have a health condition, you should not create trust because you will need to go through guardianship.
- You want to avoid estate taxes: If you want to avoid estate taxes, a trust is not the right thing to do. You will want to transfer your assets into joint tenancy with rights of survivorship.
- You want to provide for a loved one with a disability – If you want to provide for a loved one with a disability, a trust is not the right thing to do. You will want to transfer your assets into joint tenancy with rights of survivorship.
Final Words: What You Should Know Before Creating a Trust
If you want to avoid probate, you should create a revocable living trust. If you have minor children or have a loved one who has a disability, you should not create a living trust. However, in either situation, you should consult an attorney or estate planner if you are creating a trust. They can help you to ensure that it is set up properly, legally, and appropriately. Keep in mind that trusts are complex legal instruments that must be drafted by a skilled estate attorney or estate planner.