Trusts: The Basics
Use These Financial Tools to Protect and Control Assets
Trusts, like wills, are vehicles to pass property along to heirs after death. Unlike wills, some kinds of trusts bypass the process of probate, which saves time and legal costs. Other kinds of trusts serve different purposes.
Not everyone needs a trust or is best served by one, but you should understand how they work if you are advising seniors about the disposition of property. A trust is an entity created to be the legal owner of an asset or group of assets, whether real estate, bank accounts, stocks, bonds or other types of possessions. The person establishing the trust selects someone known as the trustee to be in charge of the property. This can be an individual or a bank or trust company.
If the original owners want to maintain control of the assets, they can name themselves as trustee and pick a successor trustee to take over when they die. The successor trustee will either continue to control the property for the heirs or will dissolve the trust and pass on the assets to the beneficiaries, depending on how the trust has been set up.
A living trust is the most popular alternative or adjunct to a will. While some trusts are set up in wills and don't come into existence until the property owner dies, living trusts are so-called because the person establishes them while still alive. The trusts can be revocable - meaning the person who established them can amend or dissolve them - or irrevocable, meaning the person can't. Assets in an irrevocable trust sometimes avoid federal estate taxes.
Living trusts are useful for seniors and their caregivers because they usually designate someone to take control of the property when disability sets in. This can spare caregivers from having to ask the court to name a guardian or conservator to access the property. In addition, living trusts transfer property directly to beneficiaries without having to go through probate. This process takes weeks rather than the months or even years probate can last and saves substantial amounts in probate and attorney fees.
You and the senior you care for should be aware of other trust options as you make estate-planning decisions:
AB trust, also called a bypass trust or marital life estate trust: This allows couples whose combined estates are worth more than the federal tax threshold of $675,000 to avoid taxes on anything left by one spouse in trust for the other. Upon the death of the second spouse, the property usually passes on to the children.
Totten trust: These hold savings accounts in trust for an heir and don't require the naming of a trustee. They most often are used for amounts under $20,000.
Testamentary trust: If seniors are leaving money to children but worry they'll go on a wild spending spree, these trusts authorizes an outside party - a friend or a bank, for instance - to manage the estate until the children reach a specified age. Provisions can be made for allowances, school expenses and the like.
Spendthrift trust: These protect heirs by including a provision prohibiting banks and other creditors of the estate from seeking a cut of the money in the trust.
Trusts are useful financial tools but do not solve all problems of estate planning. Some key points to remember:
It's almost impossible to include everything in trusts, so a will is always necessary to dispose of the leftovers. Wills allow for a "pour-over clause" that accounts for property not specifically mentioned.
Trusts can be more expensive to set up than wills. Whether establishing one or more trusts is cost-effective depends on the size of the estate and type of assets, debts, age, whether there is a spouse and children, and other factors.
Other devices - such as joint tenancy for spouses, laws allowing tax-free gifts before death, beneficiary designations and the like - allow for bypassing probate and saving on some taxes and other expenses without the need to create a trust.