Estate Planning: The Benefits of a Trust
January 11, 2015
We have all heard of the Last Will and Testament. Maybe you have one yourself, or have been named in someone else’s Will. But what about a Trust? A Trust is an alternative to a Will, but not many people are familiar with or understand what it does and does not do. A Trust will probably cost more to properly set up than a Will (and might require guidance of your Maryland estate planning attorney), but there are indisputable benefits that can more than offset those costs.
What is a Trust?
A Trust is simply an arrangement that lets a third party, or “trustee” handle assets on behalf of a “beneficiary.” The rules of the Trust are outlined, in detail, in a document called the Trust Agreement. The Trust Agreement provides detailed instructions as to when, how, to whom and on which conditions these assets, or income from them, are to be distributed. The Trust is managed by one or more trustees (which can be you, a friend or family member, a bank, or an attorney) who make sure that these instructions are followed. The trustee is also responsible for paying taxes, filing returns and ensuring that the Trust complies with the law.
There are many different types of trusts, but one of the most common is the Testamentary Trust—a Trust set up in a Will to hold assets until the beneficiary reaches a certain age, or fulfills certain conditions, or in some cases for the life of that beneficiary. In your Will, you name someone to be a trustee and decide when and how your beneficiaries are to receive the assets.
Another very common Trust used in estate planning is a grantor, or Revocable Living Trust. The way it works is that you, as “grantor” (also called a “settler” or “trustor”) sets up a Trust, and place all or some of your assets in it, such as stocks, bonds, real estate, valuable collections, or cash. Usually you will also be your own trustee, at least at first. The assets in the Trust are yours to use however you want during your lifetime—you can buy, sell or give away any assets you wish, just as if no trust existed. However, upon your death (or sometimes a disability or other event), another person, whom you have named, takes over as Trustee, and handles the assets, or distributes them to whoever you have named, without those assets having to pass through “probate.” (Probate is the legal process under which a court oversees the distribution of a deceased’s assets to his or her beneficiaries or heirs).
There are also Irrevocable Trusts, which means you cannot (easily) get those assets back—these Trusts are often used to remove assets from someone’s estate for tax purposes, to prevent the beneficiary or beneficiary’s creditors from getting the assets, or to allow the grantor to qualify for Medicaid without having to spend all of their assets. A Special Needs Trust is a form of irrevocable trust, which provides for an individual with special needs without disqualifying them from governmental benefits.
Reasons to Set Up a Trust:
The specific type of Trust you chose to set up will depend on your personal goals.
- Some Trusts can be used to lower or eliminate estate taxes.
- A Trust can also help you avoid creditor claims against your estate.
- Are you afraid that your 20-year-old daughter will spend all her inheritance on new shoes? A Trust can make sure that the money can only be used for certain purposes, like college tuition, travel, business or living expenses, until she reaches a certain age.
- A charitable Trust can support your favorite charity, institution or cause even after your death, and provide certain tax benefits.
- The Revocable Living Trust will save your heirs the cost and inconvenience of probate after your death. (As an added benefit, unlike a Will that becomes a public document after your death, most Trusts are private, just in case you don’t want your beneficiaries (or the neighbors) to know who got what.)
Trusts are not for everyone. Depending on the size of your estate and your wishes, a Trust may or may not be the best solution for you. It’s worth getting advice from an experienced Maryland estate planning lawyer before you decide between a Will and a Trust. Feel free to contact DK Rus Law for a free consultation to get answers to your estate planning questions.
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