Trusts are an incredibly powerful tool for protecting your legacy and ensuring that your wants and needs for estate planning are met.
What is a “Trust”?
A trust is where one person, the “trustee”, holds the title to and manages property for someone else's benefit. The trust is established by the “grantor”, and benefits the “beneficiaries.” A trust can hold a house, personal property, money, insurance proceeds, or other personal or real property. A beneficiary can be almost anyone – a family member, a friend, a charity, or even in some cases, the trustee.
Why do we use trusts?
A common misconception is that trusts are only for the well-to-do who have large estates. But this is entirely wrong. Trusts have a place in the estate plans of all kinds of people. This includes those with only modest estates. Trusts can be used to protect assets from creditors, shield an estate from certain taxes, or preserve property for children. They can be used to make a person available for government benefits. And they can be used to manage assets and funds for those incapable of doing so themselves.
Types of trusts
There are many kinds of trusts, each with their own uses and benefits. The following are only some kinds of trusts that may be useful in estate planning.
Revocable Living Trust
This is the granddaddy of trusts in estate planning. They are different than wills but often work hand-in-hand with them to distribute the estate. Revocable living trusts are most often used to avoid probate.
When a person dies, the assets that they own goes through probate. This is where the Court decides or approves of where the assets are to be distributed – e.g., heirs, creditors, etc. The process of probate can be expensive and long, sometimes taking well beyond a year. Until it is over, assets are frozen. Your children and spouse may not have access to much needed funds until probate is over. A revocable living trust can avoid this problem.
Trusts for Minors
This is a trust that holds and helps manage money for children until they reach the age of majority. Courts require that inheritances for children be placed in court. Trusts can distribute money on a regular basis or all in one go when the child is old enough. Once a child reaches a certain age or accomplishes a goal (e.g., bachelors degree), the trust will pay out.
Supplemental Needs Trusts
When a person becomes disabled they often are in need of Medicare or funding from another government program. But in order to qualify for the program, they are prohibited from having assets above a certain amount. Trusts can be used to allow the person with disabilities to have access to funds beyond the program maximums.
Marital Trust (A/B Tax Planning)
Married couples will often use trusts for a variety of reasons. Not the least of which includes asset protection and avoiding taxes. The tax exemption in Minnesota is $3 million. And there is always potential for a lower State or federal tax exemption in the future. Marital trusts can allow married couples to take full advantage of the available exemptions.
Additionally, marital trusts can be used to protect property for children and grand-children. For example, if a spouse who dies has children from a previous marriage, a trust can ensure that they get an inheritance and are not cut out – purposefully or accidentally – by the surviving spouse. And they can ensure children of a marriage get a certain inheritance regardless of whether the surviving spouse remarries.
Spendthrift trusts hold money for someone who has substantial creditors or is unable to manage money for themselves. Take for example, someone who is immature or has a drug problem. Money can be doled out to them over time instead of paid to them in one lump sum. Because these trusts are managed by an independent third person, there is less opportunity for misuse.
Trusts are valuable estate planning tools
Trusts can be incredibly powerful estate planning tools. When used and set up properly, they can ensure that your legacy is what you want it to be. Used or set up improperly, and you can tie up your assets in court for years.
One caveat we present to all our clients is that not everyone needs a revocable living trust. There are “trust attorneys” out there who work under the philosophy that everyone needs a trust, regardless of their circumstances. This is not so. A properly drafted will with the correct strategy can serve just as well if not better in some cases, depending on the circumstances.
At Signature Law, our goal is to make sure that your estate plan fits your needs and does what you want it to do. Using trusts may be the way to make sure this happens. If you would like to discuss the best ways to structure your estate, possibly with trusts, then contact us for a free consultation.