For some people, estate planning is as easy as creating a Last Will and Testament, power of attorney and advance directives, and a living will. Everyone’s situation is different, however, and there are millions of people who just can’t get away with that type of basic estate planning. Some of them have complex business concerns that need to be dealt with. Others have issues related to long-term care planning or retirement efforts. And then there are those who want to avoid probate or provide for heirs with spending problems or special needs. Those people often find that they need a trust to achieve their goals. If that sounds like your situation, then you might find yourself wondering one thing: what are trusts, and why are they needed?
What Is a Trust?
To understand what a trust really is, it’s helpful to imagine a simple example of how we all use the trust concept at different times in our lives. For example, if you give your best friend twenty dollars and ask him to give it to Joe down the street when he sees him later in the week, you’ve just created a trust. Granted, it’s much simpler and less official than an estate planning trust, but the structure and basic principle is the same.
Put simply, a trust is a legal arrangement where one party (the grantor) creates the trust and funds it with his assets, and names a second party (the trustee) to manage and protect the assets for the benefit of a third party (the beneficiary). In the example above, you would be the grantor, your best friend would be the trustee charged with managing the money you handed him, and Joe would be the beneficiary.
In addition to a grantor, trustee, and beneficiary, trusts also need assets to fund their goals. These assets are provided by the grantor, managed by the trustee, and ultimately received by the beneficiary. The trust also must have terms, which are instructions that the grantor creates to dictate how the trustee manages the trust, when and how he is to make distributions of trust assets, and which beneficiaries are to receive those assets.
What Types of Trusts Are There?
All trusts contain those basic elements, but from there things can get a little confusing for the average person. There are many kinds of trusts. There are, however, only two basic types of trusts: the living trust, which can be either revocable or irrevocable; and the testamentary trust, which is always irrevocable because it is created using provisions in your will and only comes into being once you’re dead.
The living trusts can be used for a variety of purposes, ranging from probate avoidance and privacy protection to asset security, long-term care planning, and inheritance planning for heirs with special needs. These trusts can even protect the inheritances of beneficiaries with wasteful spending habits, provide a way for you to continue to give to charity after you die, and ensure that a beloved pet is properly cared for throughout its remaining years of life.
The testamentary trust, on the other hand, is primarily used to take care of minor children, achieve certain tax objectives, reduce claims against the estate, and ensure that your wealth remains in your family. Because the trust is automatically irrevocable, it can also provide asset protection against many claims that might be made against the estate in the future.
How Can a Trust Benefit Me?
Ultimately, you’ll only want to use a trust if you can be convinced that it can benefit your planning efforts. The reality is that most of us could benefit from using some type of trust, but the exact benefits that we can enjoy will vary from person to person. Those benefits can include:
- A chance to secure future Medicaid benefits by protecting certain assets from being counted for eligibility purposes.
- A safer way to provide an inheritance to an heir with special needs, since trusts can be created in a way that helps that heir without disrupting his or her government benefit eligibility.
- More options for safeguarding your wealth from potential litigation and other creditor actions. Insurances can be helpful, but it’s not always enough.
- An effective way to control how and when your heirs receive their inheritance, while avoiding the time and cost associated with the probate process.
- The ability to minimize estate tax liability when using certain irrevocable trusts
- And more!
Can I Create My Own Trust?
You can create your own trust if you choose to do so – and there is certainly no shortage of DIY trust options available in the marketplace today. However, it’s important to understand that your trust is only as effective as its terms and structure allow it to be. And the sad fact of the matter is that there have been a whole host of DIY trusts invalidated over the years for one defect or another.
In some instances, grantors have neglected to name beneficiaries or failed to identify those heirs in a way that enabled the trustee to carry out his duties. Sometimes, the grantor just fails to fund the trust – rendering it useless. In every instance, those problems could have and should have been avoided if the grantors had relied upon professional assistance to create their trusts. Remember, trusts are based on language in the law – and sometimes you really do need a legal professional to help you with legal documents.
Where Can I Get the Help I Need?
So, what are trusts? The simple answer is that they might be the perfect tool for your legacy planning needs. Whether you’ve already decided that you need a trust or simply need to examine your circumstances and needs in more detail before deciding, a trusts attorney can help. At the Potter Law Firm, our estate planning attorneys can help you to evaluate your planning needs and determine whether a trust is the best option to meet your unique challenges. If you’d like to learn more about how trusts can impact your planning effort, contact us online or call us today at (704) 944-3245 (Charlotte, NC and Huntersville, NC), (606) 324-5516 (Ashland, KY), or (859) 372-6655 (Florence, KY).
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