To start, basic estate planning usually starts with a will. Wills deal not only with one’s property, but also with important decisions such as who will care for minor children if both parents are deceased. But wills aren’t necessarily the best, final option for every estate, especially given the legal proceedings that must occur before any assets are distributed.
In situations such as this, a trust is usually the best way to proceed.
What is a Trust?
In layman's terms, a trust is a fiduciary agreement that specifies how your assets will be distributed at the time of your passing, usually without the involvement of a probate court. Unlike a will, a trust isn’t subject to public scrutiny and can be arranged to accomplish a variety of different goals.
Trusts can be used for a variety of things such as: to transfer property, to help minimize estate taxes, to preserve assets for minors until they are adults, or even to benefit a charity.
The only downside to this is that trusts can unfortunately be very expensive to execute, especially for more complex estates such as The Trump Organization. Yet, fear not! Some attorneys offer a “basic trust package” for a flat fee. However, these bills can add up quickly if both you and your attorney(s) need to spend extra time discussing your goals before the trust agreement is drafted.
This is why it is beneficial to plan ahead! It’s important to know what assets you would like to put in your trust and how you’d like your property to be distributed.
Benefits of a Trust
Having a trust allows you peace of mind to control how your assets will be managed during, and after, your lifetime. Trusts are especially appealing for those that have special circumstances, such as caring for a family member with special needs, or even managing succession planning for a closely held business.
In terms of what we have experienced at Smith Strong, families can be complex! If there is bad blood within one’s family, or you want certain conditions to be met (such as graduating from college, or one’s 30th birthday), you can specify certain conditions that must be met in order for a transfer of assets to be executed. You don’t want your hard earned money getting into the wrong hands or being squandered!
It’s important to uphold your legacy. A trust allows you to be very specific about how, when and to whom your assets are distributed. Special-use trusts to meet various estate planning goals can also be established such as: trust funds, charitable giving, or even tax reduction!
Trusts v. Wills
The problem with the creation of wills is that: 1.) assets may have to go through “probate” – which is a lengthy and often expensive legal process of validating a will and settling an estate – and, 2.) as a result of this, they become public documents that could be scrutinized or contested.
Trusts can help solve these problems because any assets that are held within a trust can be typically managed by the successor trustee in a more private manner than a typical probate proceeding.
People often draft wills with trust provisions, otherwise known as “testamentary trusts.” These work in much the same way as other trusts, except that by their very nature they may have to go through the probate process.
This often means that the probate court could choose to distribute the deceased’s assets in a way that differs from her or his original intentions. A living or “inter-vivos” trust, on the other hand, allows the owner to plan during his or her lifetime, thereby bypassing the probate process and controlling decisions related to the distribution of assets.
Revocable and Irrevocable Trusts
A revocable trust is a trust that can be changed at any time and in any way during the owner’s lifetime, up to and including total revocation.
This is why revocable living trusts tend to be the most flexible option. With this type of trust, you transfer ownership of some or all of your property into the name of the trust, but you maintain the same level of control over the assets that you had before. In essence, you give up nothing and while gaining the assurance that your wishes can be carried out if something were to happen to you.
A living trust is a lot like a “regular” account in that you still have control over your assets. You can buy, sell and trade assets as you normally would. You’re able to move assets into and out of the trust at your discretion. The key difference is that you can put additional controls and designees in place to help protect your assets should you pass away or become incapacitated.
An irrevocable trust is one that cannot be changed or revoked after the agreement has been signed. A revocable trust becomes irrevocable upon the death of the original trust owner.
The benefit of an irrevocable trust is that, when certain conditions are met, the assets can be removed from the trustee’s estate, thereby potentially reducing the estate’s value and its associated estate tax liability. On the other hand, assets held in a revocable trust are considered part of the original owner’s estate.
Disadvantages to Trusts
There can be, unfortunately, some disadvantages to trusts. As explained previously, trusts can be more expensive and complicated to draft than that of a will.
However, incurring additional costs on the front end could help you save your heirs a significant amount of money on the back end by avoiding the probate process. But you can bypass some of these costs through the planning process. Understanding these trade-offs and determining your needs and goals will serve you well once you’re ready to engage an estate planning attorney.
When you’re ready to set up a revocable living trust, you generally have a few choices to make about who will serve as trustee when you’re gone. This is an important role. Trustees have the ability to manage the assets in the trust on behalf of the beneficiaries. They also have to make sure all the outstanding bills and taxes are paid, in addition to other official matters.
You can name a single person to serve as a trustee – some people name their spouse – or even a group of several people whom you can designate to serve in order of preference. You can also name two people to serve as co-trustees, though this generally means the two will have to agree on every decision. Lastly, you can designate a corporate trustee at a bank or trust company.
No matter who you decide to name, it’s important to involve your trustee in the process early on so he or she will be prepared to step in when the time comes. Trustees need to understand how the trust is structured and what their duties will be. They should also know where all their assets are. Having this kind of clarity can make your trustee’s work easier and help head off potential disputes between beneficiaries down the line.
Just as your family will evolve and grow over time, your estate plan does the same. For some, a simple will-based estate plan is the way to go. For others, a trust will suit their financial situation best. By consulting with an estate planning attorney, such as those at Smith Strong, PLC, you can design and develop an estate plan that is as unique as yourself.
Special Thanks to Law Clerk William Taylor Gleason for his assistance with this article.