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Trusts are an estate planning tool that allows the creator (the grantor) to entrust property to someone to manage it for another party (the beneficiary). Trusts can be categorized as either revocable or irrevocable and may be used in place of a will or in addition to a will. They provide greater flexibility than wills do because they allow the grantor to set up rules dealing with the distribution of his or her assets.
Trusts help avoid the probate process – which can be hugely beneficial, saving time and money for all parties. They also allow grantors to make sure that the assets they pass down are handled how they want.
With a will, the beneficiary simply receives a lump sum of his or her inheritance. A trust, however, can be structured so that funds are distributed at certain ages or intervals or for certain expenses. A chosen trustee typically takes over management of assets and income on behalf of the beneficiary.
In revocable trusts, also known as lifetime trusts, the grantor can change the trust or terminate it during his or her lifetime. In some cases, the grantor may also be the beneficiary and the trustee. Some states have presumptions that a trust is revocable unless there is a specific provision stating otherwise.
Irrevocable trusts cannot be revoked by the grantor unless under exceptional circumstances. The provisions of an irrevocable trust are irreversible except with the approval of all of the beneficiaries. Irrevocable trusts are sometimes established as asset protection tools. However, such trusts must be established well ahead of a pending legal or financial dispute, or their creation can be taken as an attempt to avoid debt by transferring assets. This is known as a fraudulent conveyance and can be a civil cause of action.
Some states allow a trust to take effect at the time of the grantor's death. Called a testamentary trust, this arrangement is made by the grantor ahead of time and allows them to maintain control and ownership of all possessions during their lifetime.
A special needs trust provides for someone with a disability. An attorney often tries to draft a special needs trust that assists the beneficiary without interfering with their ability to receive additional sources of assistance, such as Social Security.
Special trusts can be set up for the purpose of donating to IRS-approved charities. These irrevocable trusts name the charity as the trustee, and the trustee may invest the property to generate income. Some of this income goes to the beneficiary, and after a set date, the property is donated to the charity. This comes with a number of tax benefits.
Uniform Transfers to Minors Act trusts hold securities that will be used for the benefit of a minor. Asset protection trusts and spendthrift trusts may be established to provide protection from creditors. An attorney may also create a family trust, purpose trust or Totten trust.
Trusts are not appropriate or necessary for all assets. Assets that do not require trusts might include assets that are jointly owned, payable on death accounts, retirement plan accounts and life insurance policy proceeds.
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.