A trust is a fiduciary relationship where you (the trustor) give someone you appoint (the trustee) the right to hold title to your property or assets for a beneficiary’s benefit. In other words, trust documents lay out rules for a trustee’s distribution of assets to beneficiaries. You can fund a trust and also benefit as the beneficiary. Other trusts are for the benefit of grandchildren, children, or a charity. Let’s look at what a trust is and what the different types can do for you and your heirs. (1)
Isn’t a Last Will and Testament Enough?
When you first start making your estate plans, crucial documents include:
- Last will and testament: A will determines who the probate court will give your assets to when you pass away. (a trust can also distribute your assets)
- Advanced directives: let doctors know what kinds of medical treatments you prefer
- Power of attorney documents: Protect you in case of incompetency. A durable general power of attorney can protect you from unwanted court-appointed guardianship or give power to someone you trust in case of a medical emergency.
These documents are all essential parts of your estate plan, but you may accomplish more with a specific type of trust, depending on your goals. There is often confusion about the differences between wills and trusts.
Wills give you a way to name guardians for children. Only a will – not a living trust or any other type of document can name guardians to care for minor children.
Wills and Trusts Both Designate Inheritances
You may use a will or a trust to write out exactly who will inherit your assets.
In the case of a will, you name an executor to manage your estate in probate court. This administrator works with the probate court to inventory your estate, protect assets, pay your debts, and distribute what remains to beneficiaries.
However, with a trust, your trustee handles the estate without the need for a probate court (or an executor).
Wills simply describe assets and proclaim who gets what. A will only controls assets in your individual name. Items that have a named beneficiary, such as life insurance policies or IRA’s, will pass to the named beneficiary on the account regardless of the will.
While trusts act similarly, you must “transfer” the property into the trust – commonly referred to as “funding.” Your trust will only control the assets that you titled in the name of your trust.
If you write your will as a “pour-over” will, there is no need for an executor because your estate avoids probate court entirely. The trustee retains control of all assets and distributes them according to the terms of your trust. The purpose of a pour-over will is to move all of your assets immediately into your trust at your death. Your trustee then handles the distribution of assets to heirs and beneficiaries without a need for an executor or a court’s involvement.
A Trust Has Power
In general, trusts have specific language that gives up ownership of your assets to a trustee’s management. This giving over of your assets into a trust can have unexpected benefits. There are two main types of trusts: revocable and irrevocable. The type of trust you choose depends on your specific goals.
Revocable trusts give you more control over taking out and putting in assets as you choose. However, they do not distance you from your assets in the way an irrevocable trust can.
Irrevocable trusts place your assets in trust permanently. The trustee operates the trust according to the documentation you draw up with an attorney. An irrevocable trust can help you qualify for government benefits or reduce a tax burden.
For example, an irrevocable trust allows you to have income from your trust without legally owning those assets for Medicaid eligibility purposes. Many seniors who want to qualify for long-term care coverage from Medicaid open an irrevocable Medicaid trust at least 5 years before needing long-term care. In this way, Medicaid covers the cost of long-term care services while they still receive a qualifying amount of income from their Medicaid Trust each month.
You may easily change the terms or assets in a revocable trust. However, legal action is necessary to decant or change an irrevocable trust.
What is a Revocable Living Trust?
Revocable living trusts have many benefits while allowing you to retain control over your assets. Some of the more notable benefits include:
- Avoiding a conservatorship and guardianship. A revocable living trust allows you to authorize your spouse, partner, child, or other trusted person to manage your assets should you become incapacitated and unable to manage your own affairs. Wills only become effective when you die, so they are useless in avoiding conservatorship and guardianship proceedings during your life.
- Bypassing probate: Property in a revocable living trust does not pass through probate. Property that passes using a will guarantees probate. The probate process, designed to wrap up a person’s affairs after satisfying outstanding debts, is public and can be costly and time-consuming – sometimes taking years to resolve.
- Maintaining privacy after death: Wills are public documents; trusts are not. Anyone, including nosey neighbors, predators, and unscrupulous “charities” can discover the details of your estate if you have a will. Trusts allow you to maintain your family’s privacy after death.
- Protecting you from court challenges: Although court challenges to wills and trusts occur, attacking a trust is generally much harder than attacking a will because trust provisions are not made public.
- Provide asset protection. Trusts, and less commonly, wills, are crafted to include protective sub-trusts which allow your beneficiaries access but keep the assets from being seized by their creditors such as divorcing spouses, car accident litigants, bankruptcy trustees, and business failure.
We Can Help
At Hopler, Wilms, and Hanna, our experienced estate planning attorneys discuss your goals for the future. We work to maximize your assets for your future. Our attention to your specific family situation helps us to design an estate plan tailored to your needs. Working within the framework of different types of trust, we can help you avoid court involvement in your life, prepare for emergencies, and pay for long-term care. Contact us today to set up an initial consultation. Find out how we can help you get started making your plans.