What can Trusts Do?
Trusts are an extremely powerful estate planning tool, and there are a lot of different types of trusts suited for different purposes. But does everyone really need a trust?
In a previous post I wrote an overview of the difference between a will and a trust. You can find that here. Today let’s talk broadly about what trusts can do and some other considerations that will at least help you know what questions to ask an estate planning attorney.
Basics - Living/Revocable Trusts
A revocable or living trust is a trust that one creates while alive that is revocable, meaning it can be changed or terminated. (Contrast this with a testamentary trust, which is a trust that is created upon death; we won’t talk about that here, I just want you to know it exits as an option.) Revocable trusts can hold property that the person who created the trust, the grantor, can continue to use during life. These trusts will then direct who will get the remaining trust property upon the grantor’s death.
Revocable trusts are a great tool because they allow the grantor’s estate to avoid probate, keep their property dispositions private, and the trust can be amended or terminated at any time.
A common example of a revocable trust is a family trust established by parents with minor children. The parents can put assets into the trust and continue to use them, but upon their death their children become the beneficiaries. The idea is the trust will hold the assets until the children are the age of majority or as otherwise directed by the trust. Many of these trusts are called “sprinkling” trusts because the trustee is given the direction not to distribute everything all at once but rather in increments, usually coinciding with the age of the children.
As I’m sure you’ve guessed, there is a drawback. Because the grantor can revoke the trust at any time, that means the grantor has enough control over the trust property for a creditor to be able to attach to it, meaning collect against it.
This is where an irrevocable trust may come in handy.
Ok, so we understand revocable trusts. That must mean that irrevocable trusts can’t be revoked (changed), right?
For the most part, yes that is correct. It isn’t always impossible to change an irrevocable trust, but it is really difficult and time consuming. This also means they’re more time consuming and expensive to set up. Obviously, we don’t want to make any mistakes!
Irrevocable trusts can be used for a wide range of purposes. Creditor protection is one benefit, though bear in mind if one creates an irrevocable trust without a bona fide (genuine) purpose other than dodging creditors, the trust won’t carry that protection.
Here is an example. Professionals like doctors, lawyers, and accountants carry malpractice insurance, but this may not leave enough to care for a spouse and children if they lose a malpractice case. There are types of irrevocable trusts such professionals can use to protect assets for their loved ones.
And here too, irrevocable trusts have their own set of drawbacks. As I said before, they are more expensive to set up. It also means the grantor loses control over the assets in the trust. Greater protection means less flexibility.
Too many options, too little time
It is absolutely beyond the scope of this article to discuss all the different types of trusts out there. But generally it is helpful to know that:
Trusts can be used to protect assets not just from creditors but also from unintended beneficiaries (such as a surviving spouse’s new spouse), and even from the beneficiary themselves (spendthrift trusts assure beneficiaries who have difficulty managing their money can’t give away their cut of a trust).
They can be used for tax PLANNING, too. Read that again: tax planning, not total avoidance. Certain trusts allow you to decide who will pay taxes on trust assets and when that will be paid. This allows people to plan ahead and try to make transfers in the most advantageous way possible.
And there are many other types of trusts specific to certain situations. Special needs trusts allow disabled individuals receiving government benefits to have assets that can be used to supplement what the benefits cover. Pet trusts can be used to assure a beloved pet is cared for after death. Gun trusts allow collectors to decide what will happen to their collections.
Ok, ok. So how do I know when I need a trust?
As I said in my previous post, if you want to give gifts during life and/or you want to control what happens with the property you gift, that is usually a reliable sign you might need a trust.
If you simply want to avoid probate and it’s associated fees and delays, you may need a trust. But you may not. It depends on what you have, who you want to leave it to, and how you would like to leave it. Those are certainly valid reasons to be considered, but standing alone, they may not carry the day.
Privacy, too, may not be enough to carry the day standing alone. But something else to consider is that trusts rarely make their way into public record the way wills do. So in addition to protecting the grantor’s privacy, a trust also prevents beneficiaries from becoming the target of scams or manipulation as a result of inheritance.
If you have concerns about the topics discussed above – such as protecting assets from creditors or irresponsible beneficiaries or assuring a trust does not jeopardize a special needs beneficiary’s Social Security – that is another sign you may need a trust. Just having minor children or needing to plan for long-term care could justify setting one up.
One final thought to leave you with is this: it depends on who you have in your life that you trust. If you are in a situation where you want to leave money to someone, but you are fearful for some reason of just handing them the money, that is possibly a sign a trust is needed to accomplish your goal. Relationships are complicated, and sometimes it makes more sense to involve a third party to manage money.
The takeaway
Whether you need a trust is unique to you – your circumstances, your asset profile, your goals. Yes, we all probably prefer to avoid probate, but that doesn’t mean a trust is mandatory. Think of trusts on a sliding scale. The easier they are to set up and change, the less protection they offer, and the more difficult they are to set up and change, the more protection they offer. There are many different types of trusts available so be sure to ask your attorney if one might make sense for you, and why.