Trusts in Estate Planning

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Inheritance TrustsLiving Trusts

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Many individuals make the mistaken assumption that they don’t have an estate and, therefore, are not in need of an estate plan. In most cases, this is simply untrue.

Trusts are used for a variety of reasons in estate planning. However, they are primarily used as a way to pass assets to beneficiaries while retaining some control over how the assets are distributed and to give creditor protection to the assets in the Trust. Trusts can also be used as a way to avoid Probate.

Inheritance Trusts

Inheritance Trusts are tools that allow for the passing of assets to the grantor’s beneficiaries with restrictions on the use of funds. These Trusts can be in a Will (often called a Descendants’ Trusts) or as standalone Trusts. The grantor establishes the primary and secondary beneficiaries of the Trust assets, the rules for how the assets may be distributed to those beneficiaries, and who will serve as Trustee of the Trust. Sometimes, the beneficiary and the Trustee are the same person.

Inheritance Trusts provide for asset protection in two ways:

  • Creditor Protection
  • Protection from Divorcing Spouses

The assets in the Trust are protected from the creditors of the beneficiary because of a distribution standard included in the language of the Trust. The assets are also not considered community property if the beneficiary gets divorced because, in Trust, his or her inheritance is distinct from the property in the marriage.

Inheritance Trusts are often used as part of Estate Tax planning. Through the use of estate planning techniques, the assets in the Inheritance Trust might not be considered as a part of the grantor’s estate for estate tax purposes.

Living Trusts

Living Trusts are another type of estate planning tool that can be used in place of a Will. With a Living Trust, the grantor and the beneficiary are the same person. Therefore, the beneficiary does not get creditor protection for the assets in the Trust, as someone would get with an Inheritance Trust.

Living Trusts are useful if someone lives in a state where probating a Will is very expensive (such as California), or if they own assets in more than one state and want to avoid the need to probate their Will in multiple jurisdictions. With a Living Trust, the grantor retitles all of their assets into the name of their Living Trust, including their home, bank accounts, and beneficiary designations on their retirement accounts and life insurance. Upon their passing, the Living Trust operates like a Will in that it has instructions on how to divide and distribute the assets in the Trust and who is responsible for making those distributions (the successor Trustee). However, unlike a Will, the Trust does not need to be probated. When the Grantor of the Living Trust passes away, their successor Trustee can immediately step in and take control of the assets without having to wait to obtain Court permission. Thus, if an individual has simple assets, sometimes having a Living Trust is a good option. A Living Trust can also be a good tool for incapacity planning if a person does not have an individual to name as his or her Power of Attorney. In that case, the person may appoint a corporate fiduciary, such as a bank or a trust company, to serve as the successor Trustee of the Living Trust to manage his or her income and assets.

The “catch” with having a Living Trust is that an individual must be sure to retitle or transfer all of his or her assets into the Trust. If an asset remains “outside’ of the Trust, or in the individuals name alone, his or her family will have to Probate the individual’s Will in order to get access or control over that asset.

As always, it is important to speak with an Estate Planning Attorney to determine what tools best serve your Estate Planning goals. Contact us to speak with one of our Attorneys.

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