There are many different kinds of trusts. Trusts can be a versatile tool to help achieve many different estate-planning goals. When most people talk about “trusts,” they usually mean a family or personal property trust. We’ve all heard of “trust fund kids” and may consider this tool something only wealthy people use. In reality, many families and individuals from different wealth and income levels use many kinds of trusts for a variety of reasons.
Trusts are referred to by different names and some of them overlap. For example, a “family trust” may also be called a “personal property trust” or a “living trust.” Trusts may also be set up as “revocable” or “irrevocable” depending on needs and objectives. A trust set up during one’s lifetime is referred to as a “living trust,” while one created after death through a will is known as a “testamentary trust.”
A very common and effective use of the testamentary trust is for parents with minor children. At our firm, we always urge clients with young families to make a will that includes a “Children’s Trust” provision. This is how it works. The parents determine at what age they want their children to inherit assets (all kinds, including cash, investments, real estate, etc.) without any strings attached. At a minimum, the child should reach eighteen, the legal age of majority, to own assets outright.
Most of our clients choose to have a trust set up through their will that will only be established if the last surviving parent dies before all children reach the age at which they should be able to take title of the assets. Twenty-five is a common age our clients choose and generally it’s in the twenties. The probabilities are, most families will not see the last surviving parent die before the children reach the desired age, but of course, anything can happen.
In a testamentary trust, our clients choose a trustee to manage the assets for the children. It’s common for the trustee to be one and the same as the “guardian” named to step in and raise the children as a successor to the parents. In many cases, it makes sense to separate the jobs of trustee and guardian, especially when there’s a better-suited candidate available to manage money than the guardian.
The players in trusts include the person setting up the trust, known as the “grantor” or “settlor.” The “trustee” is the person or entity who is responsible for managing the trust assets according to the language in the trust document set forth by the grantor. The “beneficiary” is the person for whom the trust is set up to benefit.
For wealthier individuals or families facing the possibility of paying estate taxes, some kinds of trusts can be used for advanced tax planning and to transfer assets to bring down the overall value of the estate. An irrevocable life insurance trust (“ILIT”) may be used to hold life insurance policies that will benefit the heirs of the estate.
A Special Needs Trust may be set up to help provide for a disabled family member. A “spendthrift” trust can be used to hold and protect assets against creditors with claims against a beneficiary. The types of trusts available and purposes they serve go on and on.
For our clients, the most common reason to form a trust is to avoid probate. Probate is the legal action filed when a deceased person’s assets need to be passed to their heirs, either with or without a last will and testament. The costs and delays of probate motivate many families to title all of their assets into trusts because it allows them to bypass probate. The trust also helps protect privacy interests because probate is a court matter in the public record. As such your will and other private matters are made public for anyone to see.
Trusts are effective for probate avoidance the trust itself, not the individual who dies, is the title owner of the assets held in the trust. As such, when a person who otherwise would have owned assets dies, there is no probate because they didn’t own anything.
We always advise our clients who set up trusts to avoid probate to supplement the trust with a “pour-over will.” This is a last will and testament that directs that whatever assets the deceased person owned that weren’t transferred into the trust automatically “pour-over” into that trust.
A very common problem affecting various kinds of trusts is the failure of clients to actually “fund” the trust. This means that after hiring an attorney and paying legal fees for advice, consultation and drafting the legal trust papers, the clients often fail to actually transfer title of assets into the trust. This problem of unfunded trusts can make all the effort and money going into the creation of a trust worthless.
It is a reality of life and easy to understand how trusts can go unfunded. People are busy with their jobs, running businesses and raising their families. The task of funding a trust can be time-consuming, frustrating and hard to work into the daily routine. Just as many families and individuals put off the task of seeing a lawyer to discuss setting up an estate plan, many fail to get around to the funding of a trust.
This funding may involve calling financial institutions and filling out transfer papers, dealing with state agencies such as DMV and having deeds prepared to transfer real estate title. Depending on how organized the client is, there may be hassles locating documents and files, all while continuing to live their daily lives and put out the many fires that come with it. Because of these realities, at CPC Law, we stay with our trust clients through the entire process and help them with guidance and friendly reminders to make sure the job is completed on the client’s end as well as ours.
Trusts are not a good fit for every family. Sometimes probate isn’t likely to occur for many years to come and usually only after the last surviving parent dies. For example, if a married couple owns all their assets as marital property with survivor rights, the surviving spouse would automatically take title of those assets immediately upon death. Thus, probate would be avoided until the death of the last survivor. Along the way, however, the surviving spouse may revise their estate plan to achieve objectives such as probate-avoidance. This planning would likely involve the use of trusts.
Also, an estate plan built around family trusts will cost more in legal fees to set up than the plan relying mainly on a will. There may not be enough assets, complications or concerns for which a trust is a good fit and solution for problems. All individuals and families interested in discussing trusts for their estate plan should call CPC Law for a free consult to start the process of turning thoughts into action.
Contact CPC Law at (407) 851-0201 and speak to an attorney now!
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