What is a Trust for Legacy Planning? Definition, Meaning & Types
When somebody thinks of a ‘Trust,’ they usually associate it with the stereotypical ‘trust-fund-kid,’ millionaires and billionaires. In practice however, more people have a trust than how many one might think. Essentially, a Trust is an arrangement you establish for your assets upon your passing away; it is usually one of however many pieces to one’s estate plan. Trusts are meant to work for your beneficiaries, offering tax benefits and other protections.
What is a Trust?
It is a fiduciary arrangement with binding legal authority which you put your assets into, and is also managed by some third party you entrust with said responsibility. This ‘manager’ is called the trustee, and they must ensure that your estate is handled consistent with your wishes.
A trust can be a practical tool for an estate of any size. A trust can afford you: privacy; an opt-out of probate court; lowered or nullified tax obligations to gifts/estates; and greater control you’re your family’s generational wealth. There are many different kinds of Trusts, and so you really need to know your needs and goals before you decide which one you’re going to establish. We will next discuss the different types of Trusts you can create.
What is the Purpose of a Trust?
One of the most common reasons people establish a Trust is to protect one’s assets. From the moment the Trust is created, through long after that person’s passing away, a properly managed Trust will handle its contents exactly as the trustor wishes. A Trust can also be used to bypass income and asset limits which might otherwise disqualify a beneficiary from Medicaid. Similarly, if you’re thinking of financially providing for vulnerable and/or disabled family members, then a Trust can help you do so effectively.
Who Should Have a Trust?
There are several scenarios where a Trust may be strategically advantageous, like: You own some kind of residence or other dwelling (especially if its outside of the State you reside in); you own assets valued at $200k or more; you value your financial privacy; you want to simplify the probate process or render it entirely moot; you have a taxable estate; or you want to set up criteria, to be later satisfied for the Trust’s consequent disbursement of some amount of money to your beneficiar(y/ies).
Living Trust
You create a Living Trust while you are still alive. For after your passing away, this property ‘arrangement’ appoints a trustee to manage the assets in your Trust for one or more of your beneficiaries.
Revocable Living Trusts
You can also create a Revocable Living Trust while you’re still alive, however you can alter or revoke it before you die. While this type of Trust is used to bypass probate court, it is not the most effective means for protecting your assets. If you have assets in this type of Trust while you’re still alive, creditors could gain access to them.
Irrevocable Trusts
Once you’ve established this type of Trust, you cannot alter or change anything in it after-the-fact. For any and all property you put into this type of Trust, you effectively relinquish all your rights to ownership for said property. This type of Trust is particularly attractive to persons who are in professional services, like doctors or lawyers.
Joint Trusts
A Joint Trust is one that is set up for two people, usually by and for spouses. The two living parties have complete control over whatever assets are in the Trust, and can change the Trust’s framework whenever they so wish. When one party to the Joint Trust dies, the surviving party becomes the sole trustee.
Testamentary Trusts
This is a Trust that is established within the framework to a Will, which means that it ‘activates’ only after one has passed away. Because the Will directs the composition to this Trust and formally creates it upon one’s passing away, the Testamentary Trust therefore cannot be considered a ‘Living Trust.’ Lastly, in addition to weakened privacy protections, the Will itself must go through the probate process, and so this type of Trust cannot go around Probate Court.
Revocable vs Irrevocable Trust
A Revocable Trust is one which you can change while you’re still alive, so long as you are not lacking ‘capacity.’ Unlike a Revocable Trust however, an Irrevocable Trust is the converse to it; you can’t change it, and you relinquish ownership to whatever assets you put into it. This type of Trust is particularly attractive to persons in professional services who are at risk for lawsuits.
What to Add to a Trust
Not every asset is appropriate to put into your Trust. When you establish your Trust, you must name the Trust as the new owner to the assets you’re to put into it. A Trust can hold the following kinds of assets: Residence/dwelling/real estate; retirement accounts; brokerage accounts and other non-retirement investments; checking/savings/money market accounts; jewelry, vehicles, antiques, and other valuables; certain business interests; stocks/bonds in certificate form; and non-qualified annuities.
How to Name a Trust
Usually, people give their Trust a name that is both easy to remember, and makes logical sense to them. A common formula people use is “(Last Name) Family Trust,” which is so simple its cliché. You should use this kind of format so there’s as little opportunity as possible for some kind of misinterpretation.
How to Fund a Trust
Your Trust functions as ‘property manager.’ It’s designed to safeguard and possess you assets for you, and funding it just means you move your desired property into it. Certain assets can have different (or no) document requirements for reporting purposes. This can be a deed to a house, Title to a vehicle, banking documents for checking/savings/other accounts, and more. Remember, a Trust with nothing in it is of no value.
Differences Between a Will and a Trust
First and foremost, a Trust (generally, and with some exceptions) activates the moment it’s formed, whereas a Will activates upon a person’s passing away. While Trusts are designed to bypass Probate Court, property that passes through a Will must go public and go through the probate process. Lastly, each means has their own respective tax implications
What is a Trust Fund?
This is a plan put into place by a ‘grantor,’ to afford financial stability and security for some beneficiar(y/ies) of theirs. It is often used in Estate Planning, and can hold a variety of different kinds of assets to be disbursed later on.
What is a Trustee?
This is the party you’ve designated to manage the assets in your Trust. They’re pretty much the legal owner of the Trust’s contents, and are responsible for both tax filings and for disbursing the assets (or other property) to the named beneficiar(y/ies).
Can a Trustee Be Removed From a Trust?
Under certain circumstances, Yes! If they aren’t acting consistent to your wishes, or if they want to resign the position, or if they’re somehow incapable of carrying out their responsibilities. You can also outline different ways to change or to completely remove a Trustee, although you’ll likely need to consult with the beneficiar(y/ies).
Can a Trustee Use Money From the Trust ?
It’s not their personal piggybank! The Trust’s money or assets can be used only to provide for its neneficiar(y/ies).
What Is An A-B Trust?
An A-B Trust is a Joint Trust that spouses create together. Once the first spouse passes away, the Trust will split into the Survivor’s Trust, and the Decedent’s Trust. A surviving spouse can use and benefit from the assets in the Trust, but they generally can’t manage the Trust like a Trustee would.
Can I Put My Vehicles In My Trust?
Yes you can… but is it worth the hassle? Putting one’s personal vehicle in their Trust has become particularly unattractive to some people. Insurance companies don’t like dealing with Trusts. You may have to add on one or more parties as ‘Additional Insureds.’ Another option is to get special riders, but there’s no guarantee the insurance company will grant them. Instead, they may let the asset(s) pass through the Decedent’s Will. While this means the matter has to go through Probate Court, its usually a simpler process.
