There are many valuable tools to use when beginning the process of estate planning. Most people are familiar with wills. But there’s another form of estate planning known as trusts, which have specific purposes that separate them from wills. Here’s what you need to know.
What Is a Trust?
A trust is a legal arrangement by which a third party (usually referred to as the trustee) manages the assets of the trust’s beneficiaries. Depending on the type of trust, the trustee may be responsible for allowing the beneficiaries access to the assets, as opposed to a will, which directly passes the assets on to the beneficiaries. There are many reasons for doing that, and there are different types of trusts to handle different needs.
What Are the Different Kinds of Trusts?
There are two broad categories of trusts.
- Testamentary trusts. This type of trust is created through the will and doesn’t officially become active until the donor of the assets passes away. As part of a will, it goes through probate and is a public record.
- Inter vivos trusts. Inter vivos trusts become active as soon as they’re completed and exist during the donor’s lifetime. There are two types of inter vivos trusts.
- Revocable. These are frequently called living trusts. With this type of trust, the donor has the right to make any changes during their lifetime, including removing assets from the trust if they wish. These are most frequently used to manage assets, avoid probate when the donor passes away, and reduce estate taxes for beneficiaries in certain situations.
- Nonrevocable. With these types of trusts, once they’re finalized, the donor cannot make changes during their lifetime. Only the trustee named to the trust can distribute assets. This type of trust is often used for Medicaid planning.
What Are the Benefits of Using a Trust?
There are several. It’s important to know that not every benefit applies to every type of trust. Working with an experienced estate planning attorney is the best way to ensure your needs and wishes are matched with the proper type of trust.
In general, these are some of the benefits of developing a trust.
- Avoid probate. With the exception of the testamentary trust, trusts usually don’t go through probate. The advantages of that are that assets can be distributed more quickly, and trusts are private, so they don’t become part of the public record.
- Avoid or reduce estate taxes. There are some types of trusts that will help beneficiaries avoid or reduce the amount of estate taxes they would have to pay if the assets were distributed through a will rather than a trust.
- Financial protection. Some trusts can be structured to protect the assets from creditors who may be trying to get money from the beneficiaries. They can also be set up for a beneficiary who isn’t good with money management in such a way that the beneficiary can only have specific amounts at a time or for pre-approved expenses.
- Supplemental needs. Special trusts can be designed to protect beneficiaries who are disabled from losing access to benefits such as low-income housing, Medicaid, and Social Security. In this type of trust, the trustee can disburse assets as long as they don’t pay for things that the other benefits cover. The trust must be created before the person with a disability turns 65. Another advantage of these types of trusts is that by avoiding probate, the person with a disability is less likely to have their support interrupted by legal processes, meaning less stress and disruption.
- Protection when incapacitated. Once you’ve set up a trust, if you unexpectedly become incapacitated, the trustee can carry out the terms of the trust.
Are There Any Disadvantages to a Trust?
Depending on the size of the estate, setting up a trust can be time-consuming and expensive. There’s a considerable amount of legal paperwork that must be completed, including changing the names of assets like bank accounts to the name of the trust and having new titles written for vehicles, homes, and boats.
Nonrevocable trusts can’t be changed, so if the donor has second thoughts, they have little to no recourse to change the terms. This could be a problem if there’s a falling-out with one or more of the beneficiaries.
If property such as real estate is put into a trust, it can make it more challenging to refinance.
Do I Need a Will if I Have a Trust?
It’s a good idea to have both because they each serve specific purposes. If you have minor children and want to name guardians in case you pass before they become adults, you need a will to accomplish that–a trust cannot direct guardianship. Without a will naming the guardian, the guardianship of minor children will be up to the courts to determine.
Having both allows you to have specific beneficiaries named in the trust and in the will. There may be times when a trust works for some, but not all, beneficiaries, so having both takes care of all beneficiaries.
What Can I Do if I Need More Information About Creating a Trust?
Call us at 601-282-8426 for a free, in-depth, no-obligation case evaluation. As discussed above, there are many situations in which a trust can be a valuable estate planning tool. We can review your specific needs and wishes and help you determine if a trust would be a good choice for your assets and, if so, what type of trust would be best.