What is a Trust?

 

In legal terms, a trust is an entity created to hold assets to be managed for the benefit of someone else. The best way to think of a trust is like a box. A person takes assets and puts them into the “box” and they are kept in that box for the benefit of someone else.

 

How is a trust created?

 

A person called a “settlor” creates (or “settles” ) the trust, which is typically drawn up by an attorney.  The settlor choose a “trustee” to manage the trust assets for the benefit of a “beneficiary,” who may be a person, a group, or an entity. A trust may be created during a person’s life or in their will (this is called a “trust under will” or “testamentary trust”).

 

If you make a trust as part of your will, your assets will not be transferred to the trust until you pass away. Depending on your assets, this could have tax and other consequences for your beneficiaries.

 

What is a “revocable” or “irrevocable” trust? 

 

A “revocable” trust is a trust that can be changed. Typically a trust made while you are alive (an inter vivos trust) is a revocable trust, unless the terms of the trust state that it is irrevocable. This means that the settlor may put in assets and take them out again from the trust during their lifetime. They may also cancel (“revoke”) the trust altogether.

 

A trust that by its terms is “irrevocable” is a trust that assets cannot be taken back out of once they have been put in. In other words, that $50,000 you put into the trust for your grandchildren’s college education cannot be taken back out of an irrevocable trust if you fall on hard financial times.  

 

Certain types of trusts are always “irrevocable,” like life insurance trusts (ILITs).

 

Upon the settlor’s death, the trust – whether it is revocable or not during the settlor’s life – becomes irrevocable, meaning that the assets of the trust and its terms cannot be changed.  A trust made in a will is always irrevocable, as the settlor will have died before the trust comes into existence.

 

Why make a trust?

 A trust may be created for almost any purpose, and attorneys have been very creative in their drafting of trusts to meet their clients’ needs. Often, trusts are used to avoid probate or to keep family affairs private, as a will is public. A trust also offers some degree of protection to beneficiaries that a will may not.   

 

What types of trusts are there?

 

To name a few, there are dynasty trusts, charitable trusts, special needs trusts, pet trusts, Medicare/Medicaid  trusts, and life insurance trusts, among many others.

 

What is the benefit of having a trust?

 

Trusts allow you to be able to do things that you could not otherwise do. For example, if you have a disabled child who receives state assistance (i.e. if they live in an assisted living facility where they receive special medical care), if you give your child money, it could make them ineligible for state assistance. However, if you use a special needs trust, assets may be put into that trust by any third party – yourself, your child’s aunts, uncles, friends, anyone! – which the trustee may then spend for the benefit of the disabled child, WITHOUT making them ineligible for state assistance, as long as the trustee follows the rules regarding what the money may be spent on.

 

Another example is trusts for minor children. Under the law, children under  18 are not legally competent.  If you have children who are under the age of 18, they cannot receive money from you if you were to pass away suddenly, even if your will says they can. In your will, you would have to provide for a guardian to manage the money for your children, or the court would appoint a guardian. With a trust, you could have someone manage money for the benefit of your children, following your instructions, without money actually passing into your children’s hands. This is similar to the guardianship situation, but this way, you can have some peace of mind and some control over how to provide for your children if something should happen to you.   

 

How much does a trust cost?

 

The costs of a trust will vary with the complexity of the situation, but they are generally more expensive than a simple will. It is typically well worth the cost to create a trust, as probate costs may be eliminated completely, and the use of a trust may be very beneficial  regarding taxes and other consequences of asset transfers.

 

What should I put into my trust?

 

Trusts must be funded at the time they are created – if there is nothing to put in the trust, it is not a real trust, and it won’t work. Often, real property is used as the basis for a trust fund, but most attorneys recommend against using one’s home as the sole property to fund the trust.

 

Who should be the trustee of my trust?

 

The trustee depends on the circumstances. You may be the trustee of your own trust if it is made during your lifetime, and you may make a trust for your own benefit (though not if you wish to use a spendthrift clause). A trustee should be someone you can trust with making financial decisions, as the trustee has a fiduciary duty to the beneficiaries to distribute and manage funds in their sole interest. The trustee may take a small fee if the trust provides for it, or if provided for by a court of law. If you prefer, many financial companies provide trustee services to manage funds for beneficiaries, and these types of trustees have the added benefit of being neutral third parties in addition to their experience handling financial matters for others.

 

What is a spendthrift trust or spendthrift clause?

 

A spendthrift trust or clause prevents a beneficiary from assigning (i.e. giving) their interest in the trust assets to someone else, like a creditor. These types of trusts and clauses come in handy where a beneficiary tends to spend their money irresponsibly. Most creditors – with the exception of a few “super creditors,” like the state or federal government  – cannot reach the trust assets even if they know the beneficiary has an interest.  However, with a spendthrift trust or clause, the settlor cannot be the beneficiary – otherwise, the spendthrift clause is invalid, and creditors are then able to reach the assets in the trust regardless of what the trust says. 

 

How do I get a trust?

 

Your attorney can draft a trust for you to reflect your needs. If you are considering a trust as a planning tool, consult an attorney to discover the different options in your situation, as well as potential benefits and consequences for your beneficiaries. Trusts are complex, and the advice of an attorney is paramount to successfully reaching your goals with a trust. If you are interested in creating a trust, contact Nye & Associates for a consultation.