A trust is a legal instrument that allows the creator of the trust, known as a settlor, trustor, or grantor, to safeguard title to property for specific goals or purposes. Generally, the purpose of the trust could be for the mutual benefit of a person and their family, or it could be used as an endowment for charity, the arts, and other public or private endeavors. Title to the trust property is protected through a special fiduciary relationship wherein a designated trustee holds and manages the trust assets for the benefit of the trust’s beneficiaries.
For example, a trust created by a mother for her children has three categories of parties: the (1) settlor; (2) trustee; and (3) beneficiaries. Here, the mother who set up the trust is the Settlor, and a “trusted” individual or an institution, such as a bank or trust company, may act as the successor trustee alongside or in place of the mother herself. The trustee for the decedent’s estate has fiduciary duties to the beneficiaries, which means that the trustee must put the interests of the children ahead of its own in exercising the highest level of care to manage the trust property for their benefit.
Trust and estate laws can be complicated and your estate planning needs change over time. This page provides an overview of trusts but each state has its own trusts and estates laws. You may also want to consult with an estate planning attorney in your area for advice on your individual situation.
Trusts in the Context of Estate Planning
The concept of estate planning refers to measures a person can take to ensure that their assets (estate) contain instructions (planning) as to how real property will be held, disposed, and distributed during and after their lifetime. Powers of attorney can also be used alongside such instructions.
Estate planning can be achieved through testamentary instruments (legal appointment documents) such as wills, which are administered in probate court at a person’s (testator or decedent’s) time of passing. The laws governing the probate process vary from state to state, but are generally codified in every jurisdiction’s probate or estate codes, such as the:
- California Probate Code
- Texas Estates Code
- Florida Estates and Trusts Laws
- Ohio Probate Code
- New York Estates, Powers & Trusts Laws
- Arizona Trusts, Estates, and Protective Statutes
An estate planning attorney can best determine which statutes would be most relevant to a person’s circumstances. Accordingly, a validly executed trust which comports with a state’s corresponding probate and estates statutes will allow a family to maintain and grow generational wealth.
Intestacy and the Probate Process
In learning about estate planning and the benefit to trusts, the most important consideration is understanding the ramifications of doing absolutely nothing to “plan” one’s estate. A person who dies without having created any estate planning documents (e.g. wills or trusts) is said to be intestate.
The probate process is a legal proceeding whereby a court of law will determine whether a person died intestate; if the decedent died without a will, the distribution of his or her estate will be guided by the default rules of the state’s probate code, which might require that their real estate property be divided amongst their immediate family, closest surviving relatives, or “escheated” by the state itself — as in appropriated by the government — if no living decedents can be ascertained.
Even if a probate court finds that a person left behind a valid will, the court will still remain involved in a long proceeding to ensure that the will is probably administered after the testator’s death. Therefore, in the context of estate planning, the greatest benefit to creating a trust is the avoidance of the will probate process altogether, which can be expensive and can take months or years. In certain cases, special trusts can also provide liability protection and tax exemptions.
Types of Trusts
For most Americans, there are two general types of inter vivos trusts that accomplish the vast majority of their business and family goals while the Trustor is still alive and when he or she passes away or becomes incapacitated:
- Revocable Trust: A grantor may revoke this type of living trust during their lifetime such that the trust is extinguished and the grantor takes back legal title to all of the property that was formerly held in the revocable trust. Though a revocable living trust is still subject to estate taxes and offers no liability protection, its flexibility makes it attractive for most people. The grantor ordinarily reserves the right in the trust document to amend or revoke the trust at any time during his or her lifetime. This enables the grantor to revise the trust (or even provide for termination of trusts) to take into account any change of circumstances such as marriage, divorce, death, disability or even a change of mind. It also affords the grantor the peace of mind that he can undo what he has done. Upon the death of the grantor, most revocable living trusts become irrevocable and no changes are then allowed.
- Irrevocable Trust: A grantor may permanently place property into a trust without any means to take back the property or to destroy the irrevocable trust; the terms of the trust are, in a sense, set in stone. An irrevocable trust is a separate entity with its own IRS tax identification number, and its assets, which can enjoy liability protection, will pass to the beneficiaries without being subject to estate tax. In some cases and depending on the jurisdiction, court intervention or the cooperation of the parties involved may allow a grantor to achieve small exceptions to a trust’s irrevocable nature. For example, in California, the grantor and the beneficiaries may unanimously agree to terminate or modify certain trust provisions in an otherwise irrevocable trust.
- Other Trust Instruments: Other common types of trusts may be used in special circumstances or by large institutions. Charitable trusts can accomplish good for society for many generations. Testamentary trusts are special trusts that can be created at the time of a grantor’s death, usually to provide for minor beneficiaries. Generation-skipping trusts can skip over a grantor’s children and provide for the sustenance of his or her grandchildren.
In conclusion, trust properties, including trust funds (i.e. money and bank accounts held by the trust) are not subject to the probate process and can pass onto beneficiaries without any court invention in most cases. Other than those listed above, many other types of trusts are used in both personal and business contexts to accomplish different goals, and can be best prepared through a reputable trust attorney.
Speak to an Experienced Trusts Attorney Today
This article is intended to be helpful and informative. But even common legal matters can become complex and stressful. A qualified trusts lawyer can address your particular legal needs, explain the law, and represent you in court. Take the first step now and contact a local trusts attorney to discuss your specific legal situation.
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