One of the most common questions clients ask is whether they need a trust.  While they are usually seeking a “yes” or “no” answer, as with most legal questions, the correct answer usually is, “It depends.”  The answer depends on a lot of other factors such as the person’s assets and the people in their lives. With the additional answers, an attorney’s recommendation to use trust or just a Will becomes clearer.

Often a preliminary factor in whether a trust is a good idea turns on the concept of avoiding the hassle and expense of a court-supervised probate. Probate is a public legal process where assets owned individually by a person are passed to heirs. A court oversees the procedure and assesses fees against the person’s estate. Knowing a client’s own philosophical approach to handling their assets and beneficiaries is also important in recommending a trust to avoid probate. So attorneys will ask a lot of questions about what a client owns and who is involved in the client’s life to identify whether a trust is a good idea.  

• What Kinds of Assets are involved?  A client should have a good idea of the kinds of assets they own or share with others. Knowing the value of these assets is also important.  Assets that are jointly owned with a right of survivorship could avoid probate at least when one owner passes away. Assets that could transfer to others on death, like life insurance policies or certain retirement accounts, may pass outside of probate without either a Will or a trust.  However, when a person owns assets in their name only or owns out-of-state property, then the value of the property or assets will determine the amount of probate fees that could be assessed to the estate.  A trust could avoid the entire probate process, so an attorney can guide a client through the decision as to whether the client would pay more in probate fees or more for a trust.
• Who Are the People Involved?  A client’s relationships with family members or heirs also guides the recommendation for a trust.  If a client is part of a blended family, a trust may make sense in providing for both a surviving spouse on death as well as children from other relationships. A certain kind of supplemental needs trust may benefit an heir who is a disabled person and receiving needs-based disability benefits. A trust may make sense if a person’s heirs could be minors or unable handle money responsibly or in struggling marriages.  For heirs that may be chemically dependent on drugs or alcohol, a trust to protect their inheritance.

With these answers, the decision to recommend a trust becomes far clearer; although the recommendation is one that is made on a case-by-case basis for each client.

What is a trust?

So once a client has identified whether a trust could benefit them, a client often asks what a trust is and how they work. A trust is a legal arrangement where someone, a trustee, is appointed to hold and manage assets that are placed in the trust on behalf of a beneficiary, a person who gets to use the assets.  A grantor is the person who transfers assets to the trust by retitling them. For example, a house or a bank account can be retitled into the name of a trust.  Or a trust, in certain instances, could be named as a beneficiary of a life insurance policy or some retirement accounts.  Attorneys draft the trusts, which are very much like an instruction manual for handling the assets. The trust may need to include provisions for taxes on certain assets. So working with an attorney who understands the tax implications of a transfer to trust will be important.

Generally speaking, the benefits of a trust include:

• Controlling wealth by specifying when and to whom distributions from trust will be made
• Simplifying administration of a person’s estate during a time of grief
• Protecting a legacy from creditors or others who may not control money well
• Privacy and probate avoidance with a living trust

There are two kinds of trusts: (1) testamentary trusts that are created for a beneficiary upon the grantor’s death and through a Will; and (2) living trusts that are created during the grantor’s lifetime.  A living trust will avoid probate only if the grantor transferred assets to the trust during his or her lifetime. A testamentary trust does not necessarily avoid probate, but can still achieve many purposes for control, simplification, and protection.

Living trusts: Avoiding Probate, Asset Protection, Easing Transition of Assets

Living trusts come in two basic categories: Revocable and irrevocable. With a revocable living trust, the grantor can usually revoke it or change it at any time before his or her death. In many cases, the grantor also serves as the trustee and beneficiary with an unlimited right to income or trust principal during his or her lifetime.  An irrevocable trust is often used as a protective measure because an irrevocable trust cannot generally be changed and the grantor is not generally the trustee or the beneficiary.  The assets in an irrevocable trust no longer belong to the grantor, so this provides an element of asset protection.  Asset protection can be important for families in planning for long-term care and preserving assets for a spouse or providing legacy gifts to family members.

If a living trust, whether revocable or irrevocable, holds all of the grantor’s assets, then his or her estate likely will avoid probate entirely.  Living trust assets are not subject to probate. Without a probate, survivors do not have to reveal the extent of the living trust’s assets through a public filing of inventory or accountings, which lends more privacy to families. For any real estate that is out of state, if a living trust holds that property, heirs will avoid ancillary probate in those states.

Additionally, a living trust can help a grantor manage his or her financial affairs before a trustee takes over the administration of the trust’s assets if the grantor becomes incapacitated. A living trust may provide peace of mind because a trustee can continue to manage the trust’s funds in the event the grantor becomes mentally or physically incapacitated. 

Attorneys often design and use living trusts to achieve certain gift and estate tax advantages and accomplish other important family goals. Reach out to an experienced estate or elder law attorney to learn whether a trust is right for you.