What is a Trust?

There are many kinds of trusts.

Some trusts have very specific purposes for estate tax or income tax planning. Most of the trusts are included in this type. Other types of trusts are more exotic in nature and typically directed at preserving extreme wealth.

For most of us, these exotic types of trusts are not relevant. Therefore, our this firm is not involved with those types of trusts.

Federal Estate Tax Exemption

The federal estate tax exemption is now $11.4 million for an individual. That amount increases to $22.4 million for a married couple (as of 2019).

If you are in a position of needing help with planning your estate, then this information applies to you. If you’re having trouble acquiring the estate of a deceased relative, then this information is less relevant to you. However, it’s beneficial to learn about and establish a trust if you’re nearing retirement. This will protect your children in the event of your death.

If a deceased relative did not establish a Will or Trust, then you should plan to go through probate.

If you’re looking at an estate plan for tens of millions of dollars of wealth, then you should find a firm which bases its practice on “tax planning” for those types of exotic trusts & high net worth individuals.

When most people (other than those mentioned in the prior paragraph) refer to a trust, they are referring to a revocable living trust. 

A revocable living trust is created with a document called a Trust Agreement. 

A trust agreement provides that the person creating the trust (“settlor”) is transferring assets to a person or relative who will be in charge of the assets (“trustee”), for the benefit of others (“beneficiaries”). 

The trust agreement contains all of the rules which must be followed in administering the trust. In most cases, a person of average wealth will have both a Will and a Trust Agreement.

Trust Property in a Nutshell  

In order for a trust to function it is necessary for the settlor to transfer all their assets into the trust early. This is done before administering a Will.  The settlor will need to transfer bank accounts, real estate property, investment accounts, and all other property into the name of the trust. 

Once that is done, the trustee has power over all of those assets.

Why set up a Trust? 

The primary reason to establish a trust is for probate avoidance. 

If this is done properly, you may be able to avoid going to probate court, paying lots of attorney fees, and waiting for 6 months or more to acquire the assets of a family member who passes away.

If you’re in the pre-planning phase, this information is really important to consider.

When all of your assets are placed in a trust, then they transfer (at death) to your beneficiaries without having to go through probate.

In other words, setting up a trust well in advance will save your family time and money.

As with a will, you can name in your trust the people you want your assets to go to with specificity. These will pass onto the selected individuals upon death, and you can also name a successor trustee.

This person will be in charge of things in the same way a personal representative would be in a will. 

Combining yours and your spouses estate plans in a joint trust is another way to effectively manage the transition of multiple assets.  A joint trust between husband and wife provides estate planning for two, with assets flowing directly from husband to wife (or the other way around) upon the death of one spouse.

If both spouses die together in an accident or less common situation, a trust will ensure that assets be passed down to your children with ease. You can also designate a person to manage the trust until your children turn 18 if they are minors.

Incompetency provisions

Since a trust is in effect during your lifetime, not just upon your death, it can also work like health insurance.

Trusts can aid your family in taking care of your assets and finances in the event you become incapacitated. Sometimes in life, we’re stricken with either physical or mental illness. Having a trust will help your family take care of expenses on your behalf if this should occur. 

There are a few more things to consider with Trusts, such as:

  • Durable Power of Attorney
  • Health Care Power of Attorney
  • Living Will