You sometimes hear people talk about trusts or trust funds or see rich people in movies talking about their trusts and trust funds. Most people have heard of a trust but don’t know much about them off the top of their heads. It certainly sounds like something wealthy people have and talk about all the time, but trusts are not just for rich people. No matter your income, you can create a trust that serves your needs.
Narrowing trust to one definition is a little tricky because there are many different types of trusts. As a very top-level definition, a trust is an estate planning device used to ensure assets are distributed or managed according to another person’s wishes. The trust is created by the owner (also called a trustor, grantor, donor or settlor) and transferred to a trustee. A trustee can be a professional trust company, a bank, or even a relative or close friend.
The assets are held for the benefit of the beneficiaries, which could be a person or even an organization. Trusts can protect assets, save time, and reduce or avoid estate taxes. Trusts can protect assets from creditors and outline the terms of inheritance for beneficiaries.
This article will discuss the types of trusts and how trusts are created. A trust may not be the right solution for each situation, so it is advisable to seek the counsel of a licensed attorney to get some specific direction.
Testamentary Trusts
A testamentary trust, AKA “after death trust,” is created by a settlor’s will. The will transfers property into the trust upon the death of the settlor. In this case, the trust ensures that the trustee will manage the deceased’s assets as specified in the trust document. The instructions or wishes of the settlor for the trustee are written into the will.
A testamentary trust is often used when the specified beneficiary or beneficiaries are children or disabled people. In most cases, these trusts come into existence if both parents die unexpectedly and leave young children behind. Instead of having all their property, money, retirement funds, and life insurance transfer to the children, the assets move into the trust. The trustee manages the property until the children reach a certain age where they can handle the trust themselves, or simply extinguish the trust and own all the assets outright.
The trusts typically follow a HEMS standard, which means the money can be used for the “Health Education and Maintenance” of the children as they progress into adulthood.
Just so you know, 18 is probably not a great age to inherit everything. Think what you would have done with a pile of cash at 18. In my humble opinion, 30 is a pretty good age to receive everything.
Basically, these are used to preserve the assets in case tragedy strikes. It makes it a great trust for young couples with children.
Living Trust
You are an intelligent person, especially if you are reading up about trusts. I bet you can guess what a living trust is. That’s right, a living trust is created while a settlor is still alive. Sometimes you might hear these called an inter-vivos trust. A living trust can be one of two types: Revocable or irrevocable.
A living trust pays income generated by the trust to the beneficiary during the lifetime of the trustee. That way, the beneficiary does not own the property outright. The settlor or trustee can remain in control of the assets. In many cases, the trust’s assets will transfer to the beneficiary or another named person after the trustee dies.
Revocable trusts are the most popular. If they were on Instagram, revocable trusts would have 1,000,000 followers. I bet you know why they are popular. That right, revocable trusts can be revoked, changed, extinguished, or destroyed by the settlor while he or she is still in their corporeal form. (Please note that because I seem to talk about death a lot, I try to say it differently to amuse myself). I really mean that the person who creates the trust can make any changes to it as long as they are alive, thus, its popularity. Revocable trusts can be used to avoid probate if that something that really wets your whistle. (I am also trying to use old-time idioms to amuse myself). Revocable trusts often involve upfront costs and do not exempt the need for a will.
Irrevocable trusts cannot be revoked after its created. So, if you are indecisive, don’t go for this handy tool. The main benefit to an irrevocable trust is that it can be used to avoid income or estate taxes. That’s because the irrevocable trust becomes a separate entity, similar to a corporation. The assets cannot be removed, and changes cannot be made by the settlor. Furthermore, the settlor cannot be the sole trustee of an irrevocable trust.
Others Trusts
There is an array of options in establishing trusts and using them in your estate plans. Here are just a few types of trusts that can be tailored to fit your needs.
- Gun Trusts – This is a trust created for a gun owner or collector or a person who owns some heavy ordinance. This trust assists in the transporting, delivering, shipping, and use of firearms. Named trustees can possess, manage, and use any weapon held within the trust.
- Cabin Trusts – These trusts can be used to manage vacation property held by several individuals. In most cases, it is a family cabin. It helps establish the rules for the use, maintenance, and transfer of the property. Also, it allows the family to avoid the headaches associated with owning an interest in the property.
- Spendthrift Trust – These are used to pay small amounts of money to beneficiaries who cannot manage their own money. It ensures money will not be spent improperly, and creditors cannot reach any trust funds.
- Charitable Trust – These are used to make donations and save on estate taxes. For example, you can create a trust which transfers its assets to the charity after your death. In that situation, you can enjoy the IRS tax benefits and still benefit from using the assets until your demise.
Trusts in Minnesota: A Summary
Remember, trusts are not just for fancy people who attend the Kentucky Derby and drink mimosas every morning. They can be valuable tools to help with tax issues, skip probate, and help finance your kiddos should you depart this world unexpectedly.
There are living trusts (inter-vivos) and testamentary trusts – that is, trusts created after you die and trusts you can make while you are alive. Trusts can be revocable or irrevocable. Each one has its place, and each has its pros and cons.
Should you have specific questions, Nobleheart Legal would be happy to talk to you about trusts.
Remember, this blog/ website is for educational purposes and general information. It is not for specific legal advice and should not be used as a substitute for competent legal advice from an attorney.