There’s a lot of interest in money these days, with newspaper articles, magazine articles, and personal blogs filled with experiences. Whether it’s about how to save taxes or estate planning, one word that seems to be popping up everywhere is trust. You hear the word a lot, but not much is written that directly answers the questions: what are trusts, what are the different types, and do I need one?
A trust is a form of estate planning in which the settlor, who creates the trust, entrusts the trustee with the management and disposition of the property for a specific purpose. Of course, because the settlor can act as a trustee, it’s not uncommon for a settlor to create a trust and manage it himself or herself until his or her death.
One of the reasons why trusts can be so confusing is that there are many different types of trusts, depending on what you want to accomplish with the trust, the type of property you want to hold in the trust, and when you want to set it up. Basically, trusts are divided into inter-vivos trusts and testamentary trusts, depending on whether you create the trust during your lifetime or when you die, and revocable trusts and irrevocable trusts, depending on whether you are free to revoke or change the trust.
Trusts have many advantages. For example, if you’re worried that your child is a spendthrift and will squander your estate after you’re gone, you can hold property in a trust so that only certain living expenses are paid to them. Or, if your child is in debt and you’re worried that if your estate passes to them after you’re gone, it will all go to creditors, a trust is a good solution. This is because trust property is not legally considered personal property, so creditors can’t get their hands on it. Also, trust property is governed by the rules of the trust even after the creator’s death, so there’s less room for disputes over property distribution after death. With a will, the will is treated as a public document, which means that the distribution of property after death is likely to be registered with the court and made public. However, property distributed in a trust is unlikely to become public, which also helps protect your privacy.
Some people create trusts for themselves. Many people create trusts for their children so that if they get older and can no longer manage their own assets, or if their judgment becomes impaired, the trust will automatically pay for their medical and living expenses instead of leaving their property to their children. It’s a sad aspect of our society that when parents become impaired, their children often have access to their property and find themselves unable to pay for their own medical care or living expenses. A trust prevents these problems in advance, and it also benefits your children in that it doesn’t put a financial burden on them.
It’s often said that “if you keep your money in a trust, you won’t have to pay estate taxes”. This benefit doesn’t apply to all trusts, and is generally true of irrevocable trusts. Some people have a strong objection to the word “irrevocable,” but “irrevocable” doesn’t mean that it can’t be revoked at all, but rather that it’s restricted, meaning that the person who created the trust can’t just revoke it whenever they want. The most common restriction is that the beneficiaries of the trust must consent to the revocation.
A common question many people ask is, “Do I really need a trust?” Some people may feel that trusts are for the rich, as they are typically created by the wealthy. However, there’s no minimum amount to open a trust, and it’s a form of wealth management that can benefit more people than you might think. Of course, if the value of the assets you place in the trust is too low, you won’t see much benefit due to the cost of administering the trust. In general, you should consider a trust if you have a net worth of $100,000 or more, if you own a lot of real estate, or if you have strong opinions about how you want your estate to be distributed after your death.
There’s a reason we don’t write about trusts as much as we do other topics. Creating a trust involves not only federal law, but also state law in each state, and there are many different types of trusts, so people’s choices will vary depending on their circumstances and goals. Many of the benefits mentioned above may or may not be available to you depending on the type of trust you create and the form in which you create it. Therefore, we recommend that you consult with a legal professional to get a full picture of your assets, what you want to accomplish with the trust, and how you want the trust to be handled after your death.
If you have any further questions about trusts, or if there is a piece of law you would like our readers to know about, please don’t hesitate to contact us at mail@songlawfirm.com. I’ll incorporate them into my next column.