Creating an Estate Plan with Trusts

When most people think of estate planning the first idea that comes to mind is a will, but a trust is a useful tool that helps individuals plan for certain scenarios. Trusts can often be complex and confusing, but the use of trusts in a properly prepared estate plan has significant advantages. The biggest advantages of using trusts is the flexibility they provide. For example, trusts can be used to:

  • Avoid probate
  • Tax planning
  • For a loved one's special needs
  • Control over assets after death, or
  • Gifts to charity

Don't worry: Although trusts can seem daunting, an experienced trust lawyer can break down the issues into easily understandable language. Let's start with the basics. 

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What is a Trust?

Simply put, a trust is an entity that holds property. The assets held in the trust are called the principal or corpus of a trust. Typically, the trustee invests the principal of the trust for safe keeping and the trust generates income. The term of a trust could last for a few days for for hundreds of years. There are three parties to a trust: the grantor (also known as a settlor), the trustee, and the beneficiary. 

  • The Grantor. This party creates the trust and funds it by placing or titling assets in the trust itself.
  • The Trustee. The trustee is usually appointed by the grantor and is charged with properly managing the trust assets for the benefit of the beneficiary. The trustee holds legal title to the property within the trust.
  • The Beneficiary. The beneficiary is the party who receives the benefit of the trust. The beneficiary often lacks control over how the trust assets are managed but does hold beneficial title to the property within the trust.

How is a Trust Created?

A trust is created when the person who creates the trust, the grantor, executes a trust document and moves assets into the trust itself. That can mean the grantor titles certain bank accounts in the trust name or deeds certain real estate to the trust. Traditionally, the property that the trust owns is called the principal or corpus of a trust. 

Example of a Basic Trust

Nick and Ginger are married and they have three children under the age of 18. Nick and Ginger want to make sure that at their death their assets go to Jill to hold until the children are old enough to manage those assets. So they decide to create a trust within their will. At the surviving spouse's death, their assets go to Jill in trust. Jill would then take the assets, create a trust bank account, deposit the money, and manage it for the children's' benefit until they turn a certain age as determined by Nick and Ginger. 

Management of a Trust

When the trust is created, the grantor places certain rules and guidelines on how the trust assets are to be used for the benefit of the beneficiaries that the trustee must follow. For example, the trust assets could be used for the beneficiary's college expenses, medical bills, or to simply maintain the beneficiary's standard of living. The trustee has a responsibility to the beneficiary to ensure that the assets are properly managed and are being used for the benefit of the beneficiary. This duty to the beneficiary is called a fiduciary duty. If the trustee violates this fiduciary duty he can be removed from his position.

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Purposes of Trusts

Generally, a trust serves one of the following purposes:

Asset Management

It is very common for a donor to want an individual to have the benefit of an asset but they do not want the individual manage the asset. For example, a parent wants to make a gift to a child but the child may be too young or too immature to handle the property. A transfer of these assets to a trust at the donor's death would be appropriate.

Provides for a Division of Interests

If a donor wants to split the interest in a gift of property he can do so with a trust. For example, a wife could leave the income from an asset (i.e. rental property, investments, etc.) to the husband for his lifetime and then the asset would pass to wife's children. 

Postpone the Delivery of a Gift

A trust allows the donor to delay the delivery of a gift until a certain event occurs (i.e. a beneficiary turns a certain age, or achieves a certain level of education, etc.) For example, a grandparent could leave property to a grandchild but the grandchild will receive one half of the property at age 25 and one half at age 30.

Shelter Assets

A trust can be used to keep assets away from creditors or to ensure that governmental assistance for a disabled beneficiary will continue. For example, a father believes that his son is responsible with money but has concerns about potential creditors in the future. If the father puts the money into a trust that contains a spendthrift clause, the assets will generally be protected from the child's creditors.

Avoiding Probate

Probate is the court supervised process of distributing assets from the deceased person to a beneficiary. In Tennessee, probate takes approximately 6 months at a minimum to complete. As such, many people want to avoid probate due to the length of time it requires and the cost of paying an attorney. Assets places into a revocable or living trust will not pass through probate. An experienced trust lawyer can help devise a plan that will help avoid probate. 

Example of Different Types of Trusts

There are numerous amounts of trusts. Some of the most common are:

  • Revocable Trust or a Living Trust. Most of the time, this trust is created in order to avoid probate, ensure secrecy of your assets, and to help plan for incapacity. The grantor created the trust during his lifetime, moving all his assets inside the trust, and then acts as both trustee and beneficiary for his lifetime. 
  • Trusts for Children. Because Tennessee law prohibits minors from inheriting any asset until they turn 18, a minor's trust is created in an estate plan to make sure those assets are properly managed and to help avoid a guardianship.
  • Special Needs Trust. This is a type of trust that is created for individuals that usually have some sort of mental or physical disability. A trustee is appointed to manage the assets for the beneficiary's lifetime. This trust also is used often to prevent the loss of any governmental assistance the beneficiary is receiving, such as Medicaid or Social Security Disability. 
  • Dynasty Trust. The Dynasty Trust is an advanced trust that is used to avoid the estate tax over generations. The idea is that beneficiaries keep their inheritance in trust over the long term. By keeping an inheritance in trust over a long period of time the assets within the trust never have exposure to the estate tax. 
  • Qualified Terminable Interest Trust (QTIP). This type of trust is useful for second marriages. It allows the spouse to have the benefit of certain assets for his/her lifetime, but ultimately the assets would go to your children or any other beneficiary you named. 

Do You Need a Trust?

It depends on your situation and the goal you are trying to accomplish. Consider the following questions:

  • Are you worried about taxation?
  • Are you in a second marriage and trying to find a way to plan for your spouse and children?
  • Do you have creditor issues?
  • Do you have a child with a physical or mental disability?

In many cases a trust is a useful instrument in helping to manage some of these issues. But remember, your personal situation will largely dictate whether a trust would be a right fit for your estate plan. Speak with a trust lawyer and let them advise you on whether a trust would be a right fit for your estate plan and the goals you wish to accomplish.

Should You Have a Trust or a Will?

No matter what, you always need a last will and testament. Trusts are different entities from wills and a trust cannot replace a will. Although some trusts can be set up to help avoid probate, as in the case of a revocable trust or living trust, you ultimately need a will. 

What is the Difference Between a Revocable Trust and an Irrevocable Trust?

The primary difference between a revocable trust and an irrevocable trust is that a revocable trust can be easily modified and changed. Because estate plans generally change overtime, the revocable trust is a useful as a primary estate planning document. It can be modified much like a will. 

By contrast, an irrevocable trust is meant to be permanent in nature and can only be modified under specific circumstances. Irrevocable trusts such as irrevocable life insurance trusts, special needs trusts, or marital trusts can be very useful in tax planning and ensuring that your assets go where you direct.

Call Clarksville Trust Lawyer John Crow to Discuss Your Trust Needs

Trusts can be a very useful estate planning tool. An experienced trust lawyer can advise you on the best way to utilize a trust in your estate plan. If you believe a trust could help meet your estate planning goals, speak with Clarksville trust lawyer, John Crow, about your situation. John has experience preparing many different types of trusts, including revocable living trusts, special needs trusts, and asset protection trusts. Call Clarksville trust lawyer, John Crow, today to set up an appointment for your trust inquiries. We are looking forward to hearing from you!

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