Trust FAQ

What is a living trust?

A trust is a document that appoints a person, called a trustee or executor, to hold and manage property for another person, who is known as a beneficiary. The trustee can be the person who created the trust, a friend, a business partner, a trust company, or anyone else that the trust creator decides to appoint. There are a number of different types of trusts that a person may draft so the beneficiaries can maximize the assets they receive.

Do I need a trust?

While most people think that trusts are only for people who are wealthy, that is far from the truth. Almost anyone can benefit from creating a trust as it can protect against taxes and probate, as well as outline one's wishes for his or her estate. Those in the following situations should especially consider drafting a trust:

  • Own assets in real estate or a business
  • Want to leave conditions upon inheritance for heirs
  • Maximize exemptions from probate and estate tax
  • Provide for a special-needs relative
  • Want assets to go to children before the spouse dies
  • Protect assets from creditors or lawsuits

If you want to do any of the above, then a trust could be right for you. There are countless reasons to form a trust, so talk to an estate planning lawyer to see if there are benefits for your situation.

What are the benefits of setting up a trust?

Though avoiding estate tax and probate is a major incentive for people to create a trust, there are actually many other benefits of creating a trust. It can also protect property for beneficiaries that are too young or immature to handle a large sum of money. A trust can outline how the money is to be used so beneficiaries do not misuse the funds that were provided for them.

In the event that you become unable to make decisions, a living trust lets your successor trustee begin making decisions for you. With the management of the successor trustee, your property and assets will ideally be properly handled and distributed according to your wishes.

Another benefit to trusts is that there are substantially less dispute over trusts, because of the time and effort involved in the conflict. To contest a trust, all parties must go through the civil court, which costs much more than the fees associated with probate court. In addition, the contestant must prove that the creator of the will was incompetent or manipulated not only when the trust was signed, but also each time that any action was made with the trust. This is usually very difficult to prove.

Lastly, trusts are not open to the public since they are not filed with the probate court, which protects the privacy of both the creator of the trust and the beneficiaries. This cuts down on nosey or dishonest people looking to benefit from an estate.

Which type of living trust is right for me?

Depending on your specific circumstances and your desires for your assets, there may be a number of different trusts that you want to set up. There are two main types of living trusts: revocable and irrevocable. A revocable trust can be changed after it is created. A person can add more assets, alter beneficiaries, or even terminate the trust. Since the creator of the trust is still acting as the owner for all intents and purposes, the state will still tax the person on the estate while they are living.

An irrevocable trust, however, cannot be changed once it is signed. The creator gives up all rights to the property or assets within an irrevocable trust after it is created. Since the creator is unable to change an irrevocable trust, that individual is no longer considered the owner, and therefore, he or she is not taxed. One type of irrevocable trust that many people use is known as the life insurance trust. This type of trust holds life insurance for a beneficiary in order to avoid taxation.

If you are married and you want to avoid taxation, you may want to consider a credit shelter trust. This type of trust allows up to $10.5 million to be protected from estate tax. Upon one spouse's death, the funds will be transferred immediately to the other spouse.

Those who want to provide money for a beneficiary that is receiving funds from the government may want to consider a special needs trust. Under normal circumstances, those who receive inheritance money or gifts will be disqualified from receiving aid from the government. This type of trust allows assets to be provided for the special needs individual without making them ineligible for government support.

Those who want to give to a charitable organization may want to create a charitable trust, which will allow them to deduct taxes on any money that they give to charity. If the money is distributed during the creator's lifetime, however, it must be an irrevocable trust.

While these are a few examples of common trusts that you might want to consider drafting, there are others including a dynasty trust, qualified personal residence trusts, spendthrift trusts, and grantor trusts. The best way to find out which trust would be most beneficial to you is to consult with an estate planning lawyer. A legal representative will be able to understand the details of your situation and advise you on a trust that will take full advantage of your assets.

Do I need a will and a living trust?

It is beneficial for people to draft both a will and a trust. Trusts are often for valuable property or assets that will be subject to probate tax. Any smaller items should be put down in a will. A will can also serve as a back-up for any property that did not get put into the living trust.

Do I need to register my living trust with the court?

Your trust does not need to be entered into public record, like a will. You can store it any place that you consider to be safe. Make sure that you inform your successor trustee and any beneficiaries of its location so that they can find it.

Can I appoint myself as trustee?

Yes, you can appoint yourself as the trustee of your estate while you are mentally able to make decisions. Many people choose to do this instead of having someone else handle their affairs while they are still able. Those who have especially large estates may want to appoint a trustee during their lifetime, so that they are less burdened. If you choose a person to manage your affairs after your death or incapacitation, that individual is known as a successor trustee. It may be wise to appoint someone as a back-up in case something happens to the successor trustee. That way, your estate can still be managed by a person of your choosing, instead of the court.

How do I choose a trustee for my living trust?

You could choose a family member or business partner to handle your estate or you may want to choose an independent party. There are positives and negatives to both options. If you decide to appoint a paid executor, you reduce the burden of a managing estate for your spouse or another loved one. A third party will also have experience in trust administration, making them less likely to forget responsibilities. Unfortunately, a paid executor can be expensive, especially for more complicated estates.

If you choose to appoint an unpaid executor, such as a business partner or family member, then the fees for managing the estate would be waived. This option, however, may provide more reason for conflict if your beneficiaries or other disgruntled relatives do not agree with your decision. They might try to accuse the trustee of unfair dealings.

While you're looking for a suitable trustee, whether it be a third party or someone you know, there are a few qualities that you should look for to make sure that the executor is capable. First off, you can rule out any minors and felons. Non-U.S. residents may also be refused, unless they are a beneficiary or close relative. State laws should be consulted about who cannot be made an executor.

While states do not require that the trustee has experience, it is best that the executor has some familiarity with finances, taxes, and management. If you are paying someone to administrate the estate, then that person should definitely have extensive financial and legal experience. Your trustee should also have perseverance, as family members and loved ones can often be impatient and upset during the process. Make sure that you have a replacement for your executor, should they be unable to act unexpectedly.