“What is a trust?” and “How is it different from a will?” are common questions during end-of-life planning. A trust is a written set of rules that can help manage your assets during life while ensuring a smooth transition to loved ones after death. When setting up a trust, you must follow the rules outlined in your state to ensure that the trust is set up correctly, managed by a reliable individual, and properly funded. A trust can replace or supplement a will.
Types of Trusts
There are different types of trusts, each one with its own set of advantages and disadvantages, but there are two basic categories:
A revocable trust, also called a living trust, can be changed or even cancelled. If you decide the trust no longer fits your needs or wishes, you can reclaim the assets that you put into it.
An irrevocable trust cannot be changed or cancelled. Once assets are transferred into an irrevocable trust, no one can take them out.
Some common trusts include:
- A testamentary trust is set up to distribute assets after you have passed.
- An inter vivos trust is used if you want to allow a relative to have access to your planned gift or distribution while you are still alive.
- A special needs trust is a trust that is set up for a relative who receives government benefits so as not to disqualify him or her from government benefits.
- An asset protection trust is designed to protect assets from claims of future creditors.
- A charitable trust is set up to benefit a particular charity.
Should You Set Up a Trust?
A trust is not for everyone. For some, a standard will is all that’s needed. However, there are several reasons to set up a trust.
- A trust gives you greater protection than a will against legal action from anyone who is unhappy with the distribution of assets and decides to challenge it.
- Trusts offer flexibility in how assets are distributed. You detail how your assets are to be distributed to beneficiaries.
- Trusts are often established to pay for education. A college trust fund offers flexibility in how and when money is disbursed for educational expenses.
- Charitable trusts are a popular way to donate to charities.
- A trust can help determine how difficult-to-divide assets should be split up.
Trusts can minimize possible conflict between heirs.
- A trust can be set up to help you manage your assets properly if you become disabled or ill before death.
Choosing Between a Trust or a Will
It may not be easy to determine when a trust is better than a will. Consider a trust’s advantages and disadvantages as part of your decision-making process.
Trusts have the following advantages over wills:
- Trusts can take effect immediately, and therefore can handle a number of circumstances during your lifetime that wills cannot.
- Assets that pass through trusts are generally not subject to probate proceedings, meaning unnecessary delay, expense, and publicity can be avoided.
- One can usually change a trust without the formalities required for altering a will.
- Under certain circumstances, one can use trusts to obtain favorable tax treatment.
Trusts also have some disadvantages:
- Trusts are often more complicated to draft than a will. A poorly drafted trust can be nearly impossible to execute.
- To put your assets into a trust, you must make sure you change the legal name on your accounts to the trust’s name. Failing to do so may negate many of the benefits of having the trust.
- Appointing a guardian is traditionally done in a will. While there may be no legal requirement that a will be used to name a guardian, courts in your jurisdiction may be more comfortable with seeing the appointment in a will.
- Many professionals charge more in upfront fees to draft a trust. Because of the variety and complexity of trusts, you should consult with an experienced estate planning attorney for assistance.
How to Create a Trust
Once you have decided on the type of trust best suited for you, the basics of creating the trust are fairly straightforward. In general, there are three parts to establishing a trust:
- First, name your beneficiaries. This is the person or persons that will inherit your assets. Once your trust is established, your beneficiaries have a right to have the assets used for their benefit as written in the trust.
- Second, name a trustee. Make sure that you name a reliable person to serve as the trustee for your trust. This person controls and manages the trust. An unreliable trustee can upset your plans.
- Third, fund the trust. A trust can be funded by cash or property. Once property is transferred to the trust, the assets become part of the trust.
Have you ever considered what might happen, or where you would live if you couldn’t manage taking care of yourself or your home any longer? What about your parents? Are you becoming concerned about their safety as they age? Are there multiple floors to manage, are they at risk of falling, is someone checking in on them, and do they have transportation? If any of these are concerns of yours, it might be time to consider relocating to communities designed for seniors.
In addition to having a plan, and the supplies and materials to keep you and your family safe, you should also consider the importance of being able to access important documents and information that may be critical following a disaster. Having access to personal financial, insurance, medical, and other records is crucial for starting the process of recovery quickly and efficiently. Experts suggest copying and storing this information in the cloud so it can be accessed quickly in the event of an emergency.
For me the ultimate act of love is planning ahead. I call it Death Etiquette™: Death Etiquette™ - Being thoughtfully prepared for one’s own passing. Accordingly, making things easier for family and loved ones by leaving clear and concise instructions in regard to your final wishes for funeral desires as well as location and access to important documents and accounts. Further identifying who should be responsible for carrying out the final wishes and ultimately settling all the final affairs. It is a simple act which saves loved ones Stress, Time and Money…. the things which divide families!
Let’s face it, life and our stuff, is significantly more complicated than it was 20 or 30 years ago. Technology has made it so. Technology, while simplifying our lives immensely, has made for a very complicated departure.