Trusts are an effective legal tool for transferring assets for future use while also establishing rigorous yet flexible limits for how, when, and to whom those assets might be distributed—all of which can be cumbersome to accomplish within a will. Trusts are very popular in estate planning because they are flexible and can be hand-tailored to direct exactly how and when the trust assets pass to the beneficiaries.
What is a Trust?
A trust is a legal relationship between three essential parties to the trust:
- The grantor (the party creating the trust);
- The trustee (the party who manages the assets of the trust for the benefit of the beneficiary); and
- The beneficiary (the party whom the trust benefits).
A single party may function in more than one of the three roles. There are two general categories of revocable trusts: living (inter vivos) trusts and testamentary trusts. More specialized, irrevocable trusts are utilized for charitable and tax planning.
Revocable Living Trusts
Living trusts afford grantors various tools for managing wealth and, providing for loved ones. A grantor can be both the beneficiary and trustee of their own trust.
A testamentary trust is governed and funded by the terms of a will and does not exist until the grantor’s death and the probate of the grantor’s will. A testamentary trust is often utilized when a beneficiary is unable (due to age, incapacity, or character issues) to immediately inherit their full share of the trust estate. By creating a testamentary trust, the grantor can provide the beneficiary with the benefit of a trustee’s supervision over distributions to the beneficiary after death. A testamentary trust is best seen as a stopgap in the event of an unforeseen event such as an incapacitated beneficiary, or a grandchild being the beneficiary due to the untimely death of the grantor’s adult child. When it it is apparent that beneficiaries will likely require trusts after the grantor’s death, a revocable living trust is preferred over a testamentary trust.
Trusts and Avoidance of Probate
Trust assets are not part of the decedent’s estate and therefore avoid probate. While avoiding probate has its benefits, administration of a trust is not without its own demands, including prudent investment of trust assets, dealing with and keeping beneficiaries informed, distribution of trust income, filing and payment of taxes, payment of expenses, annual accountings to the beneficiaries, and final distributions.
Advantages of a Trust
Aside from avoiding probate, trust advantages are usually discussed in terms of the advantages of a trust as compared to other financial mechanisms. Some of these advantages include the following.
Your Personal And Financial Business Remain Private
There is generally no probate process with trusts, so there is no requirement to make the grantor’s personal wishes or assets public. On the other hand, wills and their contents become public record when they enter Probate Court.
Reduced Possibility of a Court Challenge
Trusts are commonly more difficult to challenge in court than a will because it may be harder to challenge the incompetence of the grantor. To successfully invalidate a will or trust, the challenger has to prove that the trust is invalid somehow or that the trustor was improperly influenced or coerced by some third party. Unlike a will, the grantor of a trust generally actively manages the trust (except irrevocable trusts) during the grantor’s lifetime. If the grantor can facilitate the transfer and management of trust assets during their lifetime, then it is more difficult to show incompetence in any incompetency claims.
Properly Funding the Trust
Additional paperwork comes with utilizing a trust. The grantor must ensure ownership of all the property designated for the trust has been legally transferred to the trust, or that all assets will transfer automatically upon death into the trust via a proper beneficiary designation. This may involve changing titles (such as deeding real estate into the trust, or making the trust owner of a bank account) or executing beneficiary designation documents (such as the property form with a brokerage account, or an LLC resolution among the members as to what happens to the LLC membership interest upon the member’s death). The additional paperwork and record-keeping is generally worth more than the time and money (and privacy) lost in probate.
Maintaining Accurate Records
A revocable living trust does not file a separate tax return for any income earned from trust assets, because the income is simply reported on the grantor’s personal tax returns under the grantor’s Social Security Number. Irrevocable trusts, however, do obtain a separate Employer Identification Number, and the trustee of the irrevocable trust is required file a separate trust tax return for the trust. Whether utilizing a revocable or irrevocable trust, if property is transferred in or out of the trust, it is important to keep accurate written records. This isn’t difficult but can be easy to forget.
How a Florida Trust Attorney Can Help You With Your Trust
A skilled and experienced trust attorney, like those at Holden, Roscow & Caedington, will be responsible for drafting an effective plan for protecting and distributing the property in the trust and maximizing the benefits for the beneficiaries. The trust attorney’s tasks also include advising clients on ethical asset protection against creditors’ claims, and mitigation of tax liability.
If you need help creating or changing a trust, contact us. We’re invested in making sure your trust is done right.