A trust, simply put, is a fiduciary arrangement intended to help you manage your wealth and assets in accordance with your wishes in the event of your death or incapacitation. A trust allows a third party, or trustee, the legal authority to manage, maintain, and distribute assets directed by the contents of the trust or as deemed necessary.
Trusts can be set up in a number of different ways and can even define exactly how and when assets may be distributed based on age, needs, and incentivized provisions including academic, entrepreneurial, or philanthropic requirements.
A trust allows you to be prepared for any contingency or circumstance.
Why Should I Create a Trust?
One of the most common reasons people set up a trust is to ensure and maintain control over what happens to their wealth, property, and investments – similar to a last will & testament. However, unlike a will, a trust may help you avoid probate – preventing your private affairs from becoming public record and undergoing a lengthy and potentially expensive court process.
What else can a trust do?
- Protect Beneficiaries
It is possible to protect loved ones from creditors, lawsuits, and familial complications such as divorce. Through the use of an irrevocable trust, future claimants or creditors may not collect assets held within the trust.
- Support Special Needs Children
Not only can funding be set aside for the care and necessities of a special needs child, a trust can also protect their future eligibility for government assistance programs such as Medicare.
- Preserve Family Wealth & Legacy
Careful planning can support and protect your family during difficult circumstances such as a divorce or remarriage in order to keep assets from leaving the family. A well-drafted trust can preserve your estate for your grandchildren and great-grandchildren.
- Establish Distribution Requirements
Incentivizing trust distributions is not uncommon. Provisions may be set up to ensure beneficiaries achieve certain goals laid out within a trust before distribution may take place. This can include furthering education, philanthropic giving, or familial requirements.
Which Type of Trust Should I use?
By definition, a trust is typically made up of three parties – a trustor, a trustee, and a beneficiary.
The person who creates the trust is known as the trustor. They are the one who identifies a trustee to have authority over their estate and all included assets, property, or wealth.
A trustee is a person responsible for the management of the trustor’s estate. They ensure that assets and wealth are distributed to beneficiaries according to the directives of the trustor.
The beneficiaries of a trust are the people who will receive the assets or property established in the trust.
While the underlying structure of a trust can remain largely the same, there are a number of different types of trusts, each carrying their own purposes and function.
Some of the most commonly utilized trusts are as follows:
- Living Trust
A trust made by a trustor during their lifetime, containing property or assets that may be used for the trustor’s benefit while alive. Property and assets pass on to a beneficiary upon the trustor’s death.
- Revocable Trust
A trust that is able to be altered, changed, or otherwise terminated by the trustor during their lifetime. A revocable trust is often used for the transfer of assets outside of the probate process.
- Irrevocable Trust
Counter to a revocable trust, an irrevocable trust cannot be altered or changed during the lifetime of the trustor, nor can it be revoked upon death. Due to assets being unable to be transferred back into the possession of the trustor, irrevocable trusts are more tax efficient and are a popular way to transfer wealth completely from the trustor and into the beneficiaries ownership.
- Testamentary Trust
This trust is an agreement made on behalf of a beneficiary once a trustor has passed and will include how assets are to be gifted after the trustor’s death. Typically instituted and carried out by the trustee and is also irrevocable.
- Funded / Unfunded Trust
Trust agreements may be set up with or without funds (assets, property, wealth). These trusts are able to be funded at any point in time during the life of or after the death of a trustor.
The above is by no means considered the limits of what a trust can do. There are many different kinds of trusts, each with their own unique uses and/or purposes drafted to suit your specific needs.
Updating & Maintaining Your Trust
The purpose of updating your trust is to ensure your estate planning efforts stay up to date with your current intentions or after major life changes. Many people opt to review their estate plan frequently and it is generally recommended to review your estate plan (and amend where needed) every 3 to 5 years or after a major life event.
Common reasons to update and amend your trust:
- Marriage or Divorce
- Birth of a Child, Adoption, Addition of Children from a New Spouse
- Addition or Removal of Beneficiaries
- Tax Adjustments
- Trustee Reassignment
- Updating Powers of Attorney
- Business Ownership/Sale
- It’s Been Five Years Since Your Last Review
There are many reasons trustors would want to update their estate plan and corresponding documents. It is also very important to do so in a timely manner. Failing to keep your estate planning documents up to date could potentially have dire consequences for your estate and beneficiaries, resulting in your intentions not being fulfilled.
The Value of an Estate Planning Attorney
Trusts and other crucial estate planning documents are the best way to retain control over your assets and wealth long after you have passed. However, the rules, taxes, language, and decisions that need to be made can become very complicated. A skilled and seasoned estate planning attorney will be able to assist you, not only by drafting legally sound documents but by ensuring your complete understanding of every decision made and by making sure no box is left unchecked.
The legal team at Kundani, Chang, Khinda, & Wilson LLP have the knowledge and insight needed to make certain your family and property are cared for when you are no longer able to do so. To learn more about how an estate planning attorney can help you, please call or contact us online today.
The best time to start planning is right now.