Potential Benefit of Having a Trust
Being prepared for the inevitability of death necessitates having a comprehensive estate plan. In order to maintain a comprehensive estate plan, this will usually require the creation and maintenance of a trust. This primer addresses how a trust could be the most beneficial estate tool you have.
What is a Trust?A trust is a legal structure where the creator of the trust provides a set of instructions explaining how and when assets will pass to certain beneficiaries of the trust. The creator, also known as the grantor, provides the instructions to his appointed trustee. The trustee is the person or the entity responsible for managing the property the creator transfers into and titles in the name of the trust. The trustee then must follow the instructions provided by the creator, which usually means providing for beneficiaries. Beneficiaries are the people or entities receiving the benefits of the property titled in the name of the trust.
Trusts come in different shapes, sizes and forms. For example, a trust can be revocable or irrevocable. A revocable trust means that the trust can be altered or amended during the creator's lifetime. An irrevocable trust means the creator cannot amend or alter the trust once it has been created, nor can the creator regain control of the money or assets used to fund or create the trust. A trust can be a living trust or a testamentary trust. A living trust is one that is created and goes into effect during the creator's lifetime. It is sometimes referred to as an "inter vivos" trust. A testamentary trust on the other hand does not go into effect until after the creator dies. A testamentary trust is usually formed by the executor of the decedent's estate when his last will and testament names the trust as a beneficiary. The will directs that his property should be moved into the trust at his death.
Why is a Trust Important and Valuable as an Estate-Planning Tool?Having a trust helps to avoid probate. Probate is a court supervised process of determining whether a will is valid. Stated another way, this is the process of "proving" a will. In New York, this process takes place in the Surrogate's Court. The probate process is expensive, long, and burdensome. The process can take longer than a year, attorney's fees, on average, may encapsulate 4-6% of the value of the decedent's estate. Additionally, the process is incredibly frustrating considering the family is dealing with the death of a loved one.
Having a trust can provide many benefits to the family or friends of the decedent. First, a trust gives the beneficiaries greater protection than a Will against legal action from anyone who is unhappy with the distribution of assets and would decide to challenge it. While it is still possible to contest the trust, alleging undue influence or mental incapacity, it is much harder. After all, it costs nothing to contest a Will. All a disgruntled family member has to do is object when the Will is presented for probate, then hire an attorney on a contingency fee basis, and wait for the final outcome. A disgruntled family member, therefore, has nothing to lose when contesting a Will. Conversely, contesting a trust may involve a substantial commitment of time and money. Whereas a Will contest is heard in Surrogates Court, a trust contest is heard in civil court where there are substantial filing fees and formal procedures that have to be followed, therefore, deterring bad-faith contests. Second, a trust allows a decedent to pass wealth efficiently and privately to heirs. The probate process means an estate will be public. All of the intimate details of the decedent's financial life and last wishes would be public. On the other hand, a trust protects privacy. Maintaining privacy would also protect from disgruntled heirs knowing who received what, which may lead to conflict among beneficiaries. Third, a trust allows an individual to take advantage of a credit shelter/bypass trust. This is a valuable tool that allows the decedent to delay paying taxes in a legal way. Finally, the trust provides decedents with more flexibility. A trust allows transfers or distributions to be made for specific purposes. The creator of the trust can spell out how assets are distributed by detailing how the estate will be paid out to certain beneficiaries and attaching conditions before those distributions are made. This is an especially helpful tool to protect the assets from beneficiaries who are unable to effectively manage their money or who cannot be relied upon to make sound financial decisions. For example, in a trust the decedent can specify for what purposes money to a beneficiary will be spent, i.e., for school or healthcare. This flexibility is priceless and vital to many decedents.
ConclusionIt is was once wisely stated that there were two certainties in life: death and taxes. Being prepared for the former of these two inevitabilities necessitates having a comprehensive estate plan. This means individuals across the socioeconomic spectrum should have certain essential estate-planning documents. A trust may be that essential document.
A trust can be a complex legal structure. While trusts can come in many shapes, sizes and forms, it is an essential estate-planning tool for many individuals. A trust must be molded and shaped to suit each individual's estate-planning goals and purposes, to help them achieve a specific goal. A complete estate plan will allow each individual to avoid potential problems that may often arise upon their death by crafting for themselves unique and individualized documents addressing who should receive their property, who will care for their children, which charities will receive their assets, and/or who will be responsible for winding down their affairs. Contact an estate attorney today to find out more information about how creating a trust may be a good fit for your estate plan.