Although you will likely execute a Last Will and Testament when you initially create an estate plan, you will likely incorporate additional estate planning tools and strategies into that plan as both your assets and your family grow. One of the most common additions to a comprehensive estate plan is a trust. The trust attorneys at Kulas & Crawford discuss how a trust might fit into your estate plan.
What Is a Trust?
At its most basic, a trust is a relationship whereby property is held by one party for the benefit of another. A Settlor (also referred to as a “Grantor” or “Trustor”) transfers assets into the trust that is then administered by a Trustee, appointed by the Settlor. All trusts must have at least one beneficiary but may have many. Trusts fall into one of two categories — testamentary or living trusts with the former not activating until the death of the Settlor and the latter activating during the lifetime of the Settlor. A living trust can also be either revocable or irrevocable.
Common Ways in Which a Trust Might Fit into an Estate Plan
- Distributing Assets — a trust is frequently a better option than a Will to distribute assets for several reasons. The ability to stagger disbursements, whether for children or other beneficiaries, is one benefit to using a trust, as is the ability to transfer assets into and out of the trust with relative ease, if you create a revocable trust. Finally, assets held in a trust are not considered probate assets, meaning they bypass the probate of your estate. Consequently, assets held in a trust can be distributed to beneficiaries immediately after your death if the trust terms dictate.
- Parents of minor children — typically choose to establish a trust because the assets intended for the children can be held in the trust until the children reach the age of majority. In the meantime, a Trustee, chosen by the Settlor (you), manages and invests the trust assets and administers the trust terms. Those assets can be used to provide for the children until they reach adulthood through regular disbursements according to the trust terms.
- Asset protection — a trust can be an effective asset protection tool if the right type of trust is created. Neither a testamentary trust nor a revocable living trust will work as an asset protection tool because assets held in either trust remain accessible to the Settlor. Consequently, the law considers those assets to be fair game for creditors or spouses as well as considers those assets when considering your eligibility for Medicaid as a senior if you ever need help covering the high cost of long-term care. On the other hand, assets transferred into an irrevocable living trust become the property of the trust once the transfer is complete. As such, the Settlor no longer has a legal interest in the assets held in the trust which means that the assets are not accessible by creditors of the Settlor, a spouse in a divorce, or others who might threaten the assets. While there are a number of specialized trusts that are used as asset protection tools, the important common thread is that they are all irrevocable living trusts.
- Avoiding federal gift and estate tax – because assets held in an irrevocable trust are no longer consider part of your estate, you could have a $5 million insurance policy that is not included in your taxable estate if you transfer the policy into an irrevocable life insurance trust. The trust can even purchase additional insurance after the trust is established. Having a trust own the policy is better than having a spouse or adult child as the owner because if that person predeceases you the policy becomes part of their estate. In addition, the Trustee is required to follow the trust terms exactly as they are written. Since you created the terms, you know exactly how the proceeds of the life insurance policy will be distributed and even used if you so choose.
- Funeral and burial planning — many people use a life insurance trust for funeral and burial planning purposes, relying on the trust terms to ensure that their wishes will be honored with regard to the handling of their body after death and the type of funeral service that is held in their honor. In addition, because the trust is funded with the proceeds of a life insurance policy, the cost of your funeral and burial is already handled, taking that stress away from your loved ones.
Contact Trust Attorneys
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns regarding how a trust might fit into your estate plan, contact the experienced trust attorneys at Kulas & Crawford by calling (772) 398-0720 to schedule an appointment.