Trusts

A trust can be defined as a transfer of property from one person, the grantor, to another person or entity, the trustee, to be held and managed for the benefit of a third person or entity, the beneficiary.   In the case of a revocable living trust, the same person may serve as grantor, trustee and beneficiary.  Other types of trusts may have different persons or entities serving in these roles.

Trusts are used extensively in connection with property held for the benefit of minors or young adults, life insurance, tax planning, marital bequests and charitable planning.

A brief description of some common trusts:

Revocable Living Trust

The most widely used trust, it can be used to achieve a variety of goals while being quite easy to manage.  Transfers of property to a revocable trust are a change in form but not in substance.  That is, the grantor retains all the control over the property that he or she had while it was individually titled, but the property is now owned by the trustee of the trust (generally yourself).  The grantor may transfer property back out of the trust and terminate the trust at any time, if competent.

There is much confusion and misleading information concerning revocable trusts.  The following are some of the advantages of a revocable trust.

  • Avoidance of Probate

    The probate process involves the local court’s oversight over the administration of a decedent’s estate.  This oversight extends only to probate assets.  What is a probate asset?  It might be easier to answer that question by working backward, and figuring out what isn’t a probate asset.  An asset that passes by contract to a beneficiary, such as life insurance and retirement accounts, or an asset that passes by operation of law to a surviving joint tenant, such as a home or bank account owned jointly by yourself and someone else, is not a probate asset.  So what’s left?  An individually titled asset, such as a non-retirement brokerage account, that has no provision in the contract for transfer to someone else at death, is a probate asset.

    The person that you designate as your executor or personal representative must provide certain information to the court, such as the amount of assets under his or her control (an inventory) and an account of the personal representative ’s management of those assets during a particular period of time.  There are fees associated with these filings.

    Since assets that have been transferred to, or made payable to, a revocable trust, are not subject to the probate process, management and distribution of those assets is greatly simplified, and the beneficiaries can generally get their share sooner.  Think of the revocable trust as a Will substitute, because it provides for the final disposition of your assets.  It does everything that a Will does, but more efficiently.

  • Management of Assets

    Property that you transfer to your revocable trust is legally owned by the trustee, which could be yourself or someone else.  If the grantor of the trust becomes disabled, the successor trustee can manage property that has been titled to the trust.  This will be an advantage to anyone with health or disability concerns.  For example, the successor trustee can insure that real property titled to the trust is properly maintained, and that the mortgage, taxes and insurance on the property are current.  In many cases, having a revocable trust in place, along with other important estate planning documents, such as an Advance Medical Directive and Durable Financial Power of Attorney can eliminate the expense and hassle of a guardianship and/or conservatorship in the event of incapacity.

  • Privacy

    When your personal representative presents your Last Will and Testament to the clerk of the court in order to qualify, the Will becomes a document of public record, as do the other documents that are later required, such as the inventory and accounting(s).  Your revocable trust is typically not filed with the court, so your estate plan is kept private.


Some other aspects of revocable trusts:

There is generally no creditor protection for assets held in a revocable trust.  Because you have total control over the assets, they are available to your creditors.

If you own out-of-state real property, and it is not jointly titled with someone such as a spouse or child, you should consider creating a revocable trust to avoid a probate proceeding in that other state upon your death.  Real estate that is properly titled to your trust will not be subject to probate in that event.

Revocable trusts are a great vehicle to achieve tax objectives, when drafted with an intent to minimize estate taxes with a bypass trust.  All income earned on trust assets during the lifetime of the grantor is reported each year on the grantor’s individual tax return.

  • Trusts for Children

    If you have minor children or young adults, establishing a trust for their benefit is an important aspect of estate planning.  A trust for your children may be established in either your Will or revocable trust.  This type of trust is revocable during your lifetime (it better be, right?) but upon your death is generally irrevocable.  If there is no Will or revocable trust (and therefore no children’s trust), and funds are left by intestacy to a minor child, those funds will usually be managed by a custodian in accordance with the Virginia Uniform Transfers to Minors Act (UTMA), or similar act of another state.  The problem, however, is that under the UTMA, as well as under similar acts of other states, the funds are transferred to the beneficiary upon reaching either age 18 or 21.  Now, think back to when you were 18, and how a suitcase full of cash may have impacted your lifestyle.  One of the major benefits of setting up a children’s trust is determining in advance the terms and conditions under which your child may receive the trust funds.

    You designate a trustee to manage funds for the child.  The trust funds are available at your death to provide for his or her health, education, maintenance and support.  At a pre-determined age, the child can become the trustee, and oversee the investment of the funds and make distributions for his or her benefit.  This prevents the child from having access to the funds before being mature enough to manage money.

  • Children’s Trust Benefits

    Assets in the trust will receive a degree of creditor protection, so that trust funds will generally be exempt from the claims of the beneficiary’s creditors.   There are exceptions to creditor protection, though.  For example, trust assets may be levied to pay obligations to the federal or state government.

    Assets held in the trust are not subject to equitable distribution upon divorce.  This means that if the child should become involved in a divorce, the court will generally have no authority to award any part of the trust assets to the other spouse, depending on state law. 

    If the trust is properly drafted and administered, assets that remain in the trust at the death of the child will not be subject to estate tax in the child’s estate.  Therefore, those assets could pass estate tax free to the next generation, but could be subject to generation skipping transfer tax.

    Finally, the trust assets will not be a countable resource for Medicaid, Supplemental Security Income, or other public entitlements, if the trust is properly drafted to achieve this goal. 

  • Bypass Trust

    Although there is an unlimited estate tax marital deduction for United States citizen spouses, the property received by the surviving spouse from the deceased spouse may be subject to estate tax upon the death of the surviving spouse.  To address this problem, a bypass trust can be funded with assets from the decedent spouse, utilizing the decedent’s estate tax applicable exclusion amount (the amount of property that can pass estate tax free at your death).

    The bypass trust is usually for the benefit of the surviving spouse (and children if desired) and can pay all income, as well as principal for certain items, in order to provide a benefit for the surviving spouse.  If the trust is properly drafted and administered, the assets in the bypass trust, at the death of the surviving spouse, are not includable in his or her estate for estate tax purposes.

  • Avoidance of Probate
  • Management of Assets
  • Privacy
  • Trusts for Children
  • Children’s Trust Benefits
  • Bypass Trust

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