Custom-Tailored Estate Plans
What is a trust and do I need one?
These are complicated questions that depend wholly on a case-by-case analysis of a potential client’s assets and estate planning desires.
A trust is a legal instrument that directs how a person wishes to have their assets administrated during and/or after their death. Property in trust at the time of a person’s death does not go through the process of probate.
In many instances, a simple will is quite capable of accomplishing the desired estate plan. However, a trust can be advantageous including for the following reasons:
Avoidance of probate and probate taxes
Property that passes through a trust is not considered part of the probated estate and therefore is not taxed according to a state’s probate tax. In Virginia and D.C. this probate tax is currently fairly minimal and often, alone, does not constitute sufficient reason to establish a trust
Unlike a will which becomes public record when admitted to probate, the trust is never filed publicly and therefore its contents remain private – known only to the grantor, the trustee and the beneficiaries.
For blended families
One major reason for a trust is in the event of a blended family in which one spouse is not the parent of some of the other spouse’s children. In a typical will, a person will leave the residue of their estate to their spouse with the presumption that the surviving spouse will adequately take care of the shared children. However, in a blended family, the parent of the non-marital children may wish to establish a trust for the benefit of the spouse so long as the spouse is alive and then for the children upon the surviving spouse’s death.
In addition to avoiding probate tax, there are other considerations regarding the estate tax and income tax that may warrant utilizing a trust rather than a simple will. This is especially true in the event that a person has significant assets in an IRA or wishes to bequest a significant amount to a non-profit.
Often referred to as a ‘spendthrift trust,’ a trust can be structured so as to provide for a beneficiary but simultaneously limit their ability to directly control the trust. This can be advantageous because the assets not directly controlled by the beneficiary are not considered to be their lawful property (until and if the trustee distributes them) and are not generally subject to the claims of the beneficiary’s creditors.
Needs of beneficiaries
Unlike a will, a trust can regulate if and when a beneficiary has access to funds even after the grantor is gone. In the case of a special needs beneficiary or a loved one who has trouble managing assets, the trust can exist for the length of that person’s life and direct the trustee to distribute only for that beneficiary’s health, education, maintenance and support (“HEMS”).
Different types of trusts
A revocable trust can be altered, amended and even revoked in full by the grantor or grantors. This means that, although the trust may be created for the benefit of others and may even be funded, at any time the grantor(s) can revoke the trust completely and reclaim all of its assets as their own property. Because the trust is revocable, however, the property within the trust is considered the lawful property of the grantor and is subject to that person’s creditors, if any.
An irrevocable trust, as the name suggests, may not be revoked once it has been created. This means that any property placed in the trust cannot be removed by the grantor(s) at will. Unlike the revocable trust, property placed in an irrevocable trust is no longer considered the lawful property of the grantor and is therefore not subject to claims of the grantor(s)’ creditors.
A trust can be both revocable and irrevocable at different times. Often a trust is created as revocable during the time of the grantor(s)’ life but specifically states that upon the last surviving grantor’s death it is to become irrevocable.
As the name implies, a living trust is created and becomes effective during the lifetime of the grantor(s). A living trust may be revocable or irrevocable depending on its terms. A person may want to create a living trust in order to begin distribution to intended beneficiaries during the grantor(s)’ lifetime and/or to diminish the size or value of the grantor(s)’ own estate prior to probate.
A testamentary trust is a trust that is created out of a testamentary document such as a will. For example, a will may instruct that upon the testator’s death, a trust be created for the benefit of the testator’s spouse assuming the spouse has survived the testator. The terms of this trust are actually outlined within the will and are usually fairly simple.
A spendthrift trust is a trust that limits the ability of any one beneficiary to control the assets within. For instance, any trust in which the beneficiary is not simultaneously the trustee and which directs the trustee to distribute assets to the beneficiary only under certain circumstances is a spendthrift trust. By limiting the ability of the beneficiary to control the assets or the distribution of the assets within the trust, the trust assets are protected from claims of the beneficiary’s would-be creditors because they are not directly under his/her control until and unless they are distributed by the trustee.