Trusts

Estate planning is a proactive measure to ensure that your family remains well-supported in your absence. At the heart of estate planning lies the concept of a trust. Trusts can be established while you’re alive or be activated posthumously. They serve as a mechanism to ensure your property and assets are handled as per your intentions. Additionally, trusts can help your family bypass the often time-consuming and expensive court procedures associated with inheritance.

This guide provides a foundational understanding of trust formation, its advantages, and potential challenges. It aims to assist you in weighing your options, contemplating your wealth and assets, and deciding the best course for their management after your departure.

Overview

A trust is a legal arrangement where one party holds property or assets on behalf of another. To better understand how trusts operate, let’s break down the key players involved:

1. Grantor/Settlor/Trustor: This is the individual who initiates the trust by transferring property or assets into it. The exact title (grantor, settlor, or trustor) may vary based on the jurisdiction.
2. Trustee: The trustee is responsible for managing the property or assets within the trust. Their primary duty is to act in the best interests of the beneficiaries.
3. Beneficiaries: These are the individuals or entities who stand to benefit from the trust, either immediately or in the future.

There are various kinds of trusts, each tailored to specific needs and situations:

• Living Trust (Inter Vivos Trust): This type of trust becomes effective during the lifetime of the grantor. The grantor has the flexibility to designate the trust as either:
  • Revocable: Allows the grantor to modify or dissolve the trust during their lifetime.
  • Irrevocable: Once established, this trust cannot be changed or revoked.
• Testamentary Trust: Incorporated into a will, this trust comes into effect only after the grantor’s death.
• Specialized Trusts: Depending on the purpose and the type of property involved, there are various trusts like life insurance trusts, real estate trusts, spendthrift trusts, asset protection trusts, and charitable remainder trusts.

Lastly, it’s important to distinguish between Express Trusts and Trusts Imposed by Law:

• Express Trusts: These are intentionally set up by individuals for a specific beneficiary or cause. They are deliberate creations to fulfill a clear purpose.
• Trusts Imposed by Law: Sometimes, courts create trusts to rectify situations where property or assets have been improperly acquired or handled. Examples include constructive trusts and resulting trusts. These are not set up by an individual’s intention but are rather imposed by legal necessity.

For the purpose of this discussion, our primary focus is on express trusts, which are purposefully established to benefit specific individuals or entities.

Understanding Trust Creation

Establishing a Trust: When you establish a trust, you’re essentially transferring the legal ownership of your property to a designated individual or institution. This entity or individual will manage the property for a designated time, intended for the benefit of a person you select. This managing entity is termed the “trustee”. It could be a bank, a relative, or even yourself. If you decide to be your own trustee, remember to designate a successor trustee for instances when you might become incapacitated or upon your passing.

The creation of a trust sets up a fiduciary bond. This means the trustee is obligated to prioritize the beneficiary’s best interests. This fiduciary responsibility remains steadfast, regardless if the trustee is you or an external party. If the trustee fails in this duty, resulting in harm to the beneficiary’s interest, legal actions can be pursued against them.

Furthermore, it’s vital to understand the difference between a testamentary trust and a living trust:

1. Testamentary Trust: This type of trust is often embedded within a will and only takes effect upon your passing. The trustee then follows your will’s directives. The terms of the trust dictate when and under what conditions the beneficiary can access the trust’s assets, including any distribution schedule.
2. Living Trust: Initiated while you’re still alive, this trust involves transferring assets during your lifetime.

Advantages and Limitations:

Pros: Living trusts can potentially help beneficiaries sidestep the probate process, saving them both time and financial resources. This is due to the assets being transferred while you’re alive, excluding them from your end-of-life assets.

Cons: Setting up a trust isn’t a straightforward process. Not only might they be costlier than drafting wills, but they also come with risks of mismanagement. If asset titles aren’t transferred correctly during your life, the assets might still have to undergo probate. This could result in the exact inconvenience and expenses you hoped your loved ones would bypass with the trust’s assistance.

Key Questions for Your First Attorney Meeting

When discussing trusts with an attorney, consider asking the following pivotal questions:

1. Who is the legal owner of property held in a trust?
2. Is it permissible for a trustee to withdraw funds from the trust?
3. What are the advantages and disadvantages associated with trusts?
4. How does one establish a trust? Is it possible to have a trust without formal documentation?
5. Can trusts be utilized to circumvent estate taxes?
6. How should one go about selecting a trustee to oversee the trust agreement?
7. For how long does a trustee maintain legal ownership of the trust’s assets?

Choosing the Ideal Attorney for Trust Matters

It’s vital to engage an attorney well-versed in the specific legal domain relevant to your situation. If you’re delving into trusts, seeking out an estate lawyer with a background in trust formation can be beneficial.

The Importance of Consulting with a Lawyer

A seasoned attorney is instrumental in devising a robust estate plan compliant with state regulations, ensuring it withstands any legal challenges and effectively sidesteps the probate procedure. They will guide you in selecting the trust type best aligned with your assets. Moreover, they can elucidate the trustee’s responsibilities, offer pertinent legal counsel to ensure your directives are respected, and even serve as the trustee if you so choose.

By foreseeing potential hurdles in your estate planning, an attorney provides preemptive solutions. They also handle the administrative tasks, such as monitoring deadlines and submitting necessary documents to relevant entities, alleviating some of your burdens.