Trusts 101: Understanding Your Estate Plan's Most Important Tool
Trusts 101: Understanding Your Estate Plan's Most Important Tool
Trusts are a popular estate planning tool and in this era of an aging population, you can expect that this tool will be utilized even more.
But just what is a trust? And what can it do for you?
Put simply, a trust is a separate legal entity that holds ownership to your assets. You can continue to maintain control over these assets and do with them as you wish by appointing yourself as the Trustee. But it is the trust that actually maintains ownership and this little change can make a huge difference in how your estate is treated when you die.
With a Will, your estate must go through probate in order to distribute your assets after you're gone. And in case you're wondering, probate can be a lengthy and expensive process. But with a trust, you don't own those assets so there's nothing to probate. You simply name a successor trustee who can legally take over the trust after you pass. And no probate means no probate fees.
Trusts can also protect your estate from the death tax and should you want to get creative with how those assets are distributed upon your death, a trust can help you do just that. Give beneficiaries inheritance incentives based on achievements, provide for disabled dependents and protect your assets from divorces, lawsuits and even creditors.
There are of course, different types of trusts; each designed to meet a specific need. The degree of flexibility and control under different types of trusts can vary and some are more complex than others. They must all be in accordance with state laws, so if you have a trust that was created in another state, you'll want to make sure it meets the requirements of New York state law.
Parties to the Trust
A trust arrangement essentially involves a trustor, a trustee, the beneficiaries, the trust property and the trust agreement. The trust agreement is the document that describes the details involved in your arrangement. The trustor is the individual or party who provides the property and creates the trust.
The trustee is the party, which may be one or more individuals, an institution or even an organization, that holds legal title to the trust property and is made responsible for managing and administering its assets by the trustor. The trustor may designate him or herself in this role and a trustee may also be appointed by a court under certain circumstances.
The Types of Trusts
Many kinds of trusts are available. They may be classified by their purpose, creation method, by the nature of the trust property or by their duration. One way to describe trusts is by their relationship to the life of their creator - those created while the trustor is alive are referred to as living trusts. Those created after the trustor has passed on, typically through a Will, are called testamentary trusts.
Living trusts may be revocable or irrevocable. In revocable trusts the trustor can retain control of the property if they wish and the terms of the trust can be changed or cancelled. An irrevocable living trust on the other hand, may not be changed or terminated after the agreement is executed.
Any property held by the trust does not go through probate and is therefore, not public record.
A testamentary trust is a component of a Will and is created when the trustor passes away. The designated trustee then steps in and distributes or manages the assets of the trust according to the deceased's wishes. The basic difference between a testamentary trust and a living trust - other than when they're created - is that property put into a testamentary trust goes through probate first and is also subject to taxes.
Costs and other considerations
The costs involved in creating and administering a trust will vary depending upon the type of trust you need and its duration. To ensure that your trust both meets state laws and provides the protections you seek, you should enlist the help of a qualified estate planning attorney before executing any legal documents.
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