Nuts and Bolts of Trusts, Part 1
What are trusts and how do they work?
We’ve all heard of trusts, but they often seem unapproachable to the average person. Despite their reputation, trusts can be beneficial to people from all walks of life. Though they can be complex in nature, with the assistance of an experienced estate planning attorney, anyone can form a trust suited to their needs and financial goals. In this article, we’ll explore what trusts are, how they work, and the benefits they offer. This will be the first of several posts covering the topic.
Let’s start with a basic question: What Is a Trust?
A trust is a legal arrangement in which one party (the grantor or testator or creator) transfers ownership of assets to another party (the trustee) to manage those assets for the benefit of a third party (the beneficiary). As the creator, you set the terms of the trust, outlining the particulars of how and when the trustee should distribute the assets to the beneficiaries.
Where do you find Trusts?
Trusts can be created in a Will in which case they are called “testamentary trusts.” These trusts become effective upon a person’s passing. Then there are stand-alone trusts that are effective during life and after death which are called “living trusts.” Living trusts in turn can be of two different types, revocable and irrevocable.
Why have a Trust?
There are numerous types of trusts for different scenarios, and meeting with an estate planning attorney to discuss your situation is critical to find out what is best for you. But, in general, here are some of the beneficial characteristics of trusts:
- Avoid Probate: One of the most significant advantages of a living trust is that it allows you to pass your estate to your loved ones without going through the probate process. Probate can be time-consuming and expensive, and a probate estate must remain open for 7 months to allow creditors an opportunity to make claims against the estate. A trust estate is handled privately and can typically be administered in as little as 3-4 months.
- Privacy: Wills become public record during the probate process, but living trusts are private documents. In a trust administration, the details of your estate, including your assets and who receives them, are kept confidential from anyone who is not a party to the trust.
- Tax Advantages: Your loved ones can reap the benefit of reduced estate taxes when your assets are held in certain types of trusts.
- Asset Protection: Irrevocable trusts can protect your assets from lawsuits and creditors. Many people utilize irrevocable trusts to shield their life savings and home from the rising costs of long-term care. Trusts can also be used to shield your children’s inheritance from divorce.
- Control and Flexibility: You can control how and when your assets are distributed. For example, you can decide when your beneficiaries receive their inheritance, such as when they reach a certain age or when they graduate college. You can also specify what the money you give to someone may be used for, for example, you can give a certain amount to a grandchild toward paying for college or a house.
- Support for Beneficiaries: Trusts can be customized to meet the specific needs of your beneficiaries. For example, if you have a child with special needs, or a beneficiary who isn’t financially responsible, a trust can ensure that the money you leave for them is used the way you intended for their benefit.
Now that you have a better understanding what a trust is and how it can be beneficial to you and your loved ones, you may be curious to learn more about the different kinds of trusts there are. We will cover these topics in the next segments of our series on trusts.