What is the Purpose of a Trust?
You have probably heard of trusts or trust funds. Trusts represent a financial relationship between a trustor, trustee, and beneficiary. The trustor is the person who creates the trust; sometimes, the trustor is referred to as the grantor or settlor. The trustor authorizes the trustee to hold and control specified property and assets for a third party, the beneficiary.
The goal of setting up a trust is to protect the named property and assets. Trusts ensure these assets are allocated according to the trustor's wishes. Additionally, trusts can save time and paperwork, and in some cases, can help beneficiaries avoid inheritance and estate taxes.
Trusts essentially provide guidance and instructions on how a person's money and assets should be managed during life and after death. The benefits of a trust are significant for any estate.
What Is a Living Trust?
A revocable living trust is established when a grantor, while still alive, designates a trustee to manage their assets. After their death, the grantor's assets are distributed to their named beneficiaries. The trustee manages the trust with the best interests of the beneficiaries in mind.
This type of trust is designed to streamline the transfer of assets to the beneficiary after the grantor's death. Because a living trust is already in effect, the assets can avoid the lengthy, expensive probate process when the grantor dies.
The Benefits of Having a Living Trust
Living trusts can help you effectively manage your estate, preserve your wealth, and secure assets for future generations. If you die without a living trust or will, the courts will be responsible for distributing your assets.
Living trusts allow you to identify how you would like your estate handled after your death. Through a living trust, you can specify beneficiaries you would like to inherit. This guidance is particularly valuable for your surviving relatives and descendants.
Avoiding Probate and Protecting Privacy
Another reason to have a trust is to preserve your privacy. Because wills must go through the probate process, it is entered into the public record. This means that the value and inventory of your state will also be made publicly available. Living trusts are private documents, and assets covered in the trust can avoid probate.
Because probate is so long, expensive, and horrible, most people do not want their spouses or other heirs to have to go through it after their death. Thus they create living trusts. A trust is a distinct entity, and not the same as the settlor. Therefor, when the settlor dies, the trust continues to hold all property.
Estate Tax Planning Through Living Trusts
Living trusts allow you to do effective estate tax planning. Federally, every American has a $5,000,000 lifetime exclusion for all gifts made during life and upon death, indexed for the effects of inflation from 2011 ($5,490,000 in 2017). This may seem like a lot of money, but Massachusetts only has a $1,000,000 exclusion, and once you exceed it, it retroactively affects all assets in your estate.
Imagine you and your spouse have about $2M together. You may think great, we have $2M plus we each have a $1M exclusion, we will be all set. Except unlike on a federal level, there is no portability. This means that if you die leaving all assets to your spouse, your spouse now has a $2M estate and is not entitled to use your $1M exclusion. Thus your spouse will have a taxable estate.
By using a trust we can instead create what we call an AB trust. It will be one trust that after the first spouse's death becomes two. The first trust will be the survivor's trust to hold the surviving settlor's assets. They can do whatever they want with it. The second trust will be the bypass trust and will be funded with the deceased settlor's assets.
The surviving spouse can be the trustee of the Bypass Trust, can receive all net income annually from the Bypass Trust, can pay themselves principal for their heath, education, maintenance, and support, and can withdraw 5% of the principal each year for any reason. However, the taxing authorities will still not consider it the property of the surviving spouse and so it will qualify to use the exclusion of the deceased spouse. This way we use the full $2M of exclusion.
Avoiding Problems with Joint Tenancy and Life Insurance
Through a living trust, you can avoid the problems of using joint tenancy. In joint tenancy, you give up part ownership in the property, and your heirs will get a complete step-up in basis. However, with a trust, you retain full ownership.
You also avoid the pitfalls of just using life insurance. With a living trust, you are not paying costly mortality costs and all of your assets will be included.
Who Should Have a Trust?
Many people are surprised to hear that most people can benefit from a living trust. Trusts are not just for preserving your wealth for your beneficiaries. They are also important for people who are looking to protect their own future in case of incapacitation. This is especially important for single people and the elderly.
You can also benefit if you:
- Own property
- Have minor children to provide for
- Have assets to leave behind
A living trust can be used to secure an inheritance for children or to name charitable beneficiaries. They can also ensure your dependent loved ones with special needs are taken care of in the event of your death or incapacitation. You can also use a trust to designate funds and instructions for burial and funeral plans.
If you suffer an accident or become mentally incapacitated, your trustee can ensure you receive the care you need. Within your trust, you can outline your preferred healthcare plans, ensuring you are taken care of according to your wishes.
To get started, call our estate and trust planning attorneys at (508) 252-8186 or contact us online.