1. Advanced Estate Planning: Introduction
  2. Advanced Estate Planning: Information For Caregivers And Survivors
  3. Advanced Estate Planning: Setting Up Your Will
  4. Advanced Estate Planning: Healthcare Documents
  5. Advanced Estate Planning: Durable Power Of Attorney For Finances
  6. Advanced Estate Planning: Using Trusts
  7. Advanced Estate Planning: Child Care Documents
  8. Advanced Estate Planning: Reviewing Life Matters And Planning
  9. Advanced Estate Planning: Final Arrangements
  10. Advanced Estate Planning: Executor Selection And Guide
  11. Advanced Estate Planning: Conclusion

By Steven Merkel

While making a will is one of the most important documents in estate planning, there are typically always a few items, property, or accounts that while they're included in your will they will still need to pass through the probate court process.

Probate court is a state legal process for administering a deceased person's estate. This court is a surrogate or family court that approves or assigns an executor for the deceased estate in order to facilitate the claims and distribution of the deceased's property. One way to avoid probate and take special care of your loved ones is to set up a trust document. Trusts can be used for several reasons, but we'll discuss some of the more common trusts and uses in this chapter. (For background reading, see Skipping-Out On Probate Costs.)

What Is a Trust?
A trust is a legal document that permits you and your successor trustee to transfer assets (such as property) prior to and after your death. It is typically composed of four main components:

  • Grantor: This is the person that sets up the trust
  • Trustee and Successor Trustee: This is the person(s) or entity that will follow your wishes as per the trust document (manage your trust) upon your death
  • Property: These are the items, money or physical property that makes up the trust
  • Beneficiaries: These are the individuals or organizations that will benefit from your trust assets
You can add specific requirements such as restrictions on distributions, attainment of certain goals for beneficiaries to receive trust property, and payment and replacement of the successor trustee under certain conditions. The four sections above are the general "must have" pieces of the trust document.

Who Needs a Trust?
The common misconception is that you have to be rich to setup a trust document. While that may be a valid point if there's at least $100,000 or more of assets for the trust, there is no monetary requirement. Hiring an attorney to draft trust documents costs between $1,000 and $3,000, depending on the complexity of the assets, so the assets should be worthwhile if you're going to spend that kind of cash. If you simply have one or two valuable items that might have to go through the probate process, it might still make sense to set up a trust even though these items do not exceed $100,000.

In cases where special-needs children are beneficiaries of an eventual estate, it makes perfect sense to have a trust. These are typically children or grandchildren that to give your assets to, but they might have mental or hospitalization issues that would prevent them from responsibly handling large sums of money. Irresponsible children with alcohol and drug addictions would also fit this category. Your court-appointed successor trustee can be given the power to use trust property for the care, maintenance and well-being of these individuals.

Types of Trusts
Trusts can be set up in many different ways depending on your goals. The reasons for a trust will vary from individual to individual and might include removal of assets from an estate, taking care of a special needs child or avoiding probate, just to name a few. Here are some of the more common types of trusts:

Revocable Trusts

  • Most common trust
  • Maintains total control of the trust provisions
  • Avoids probate
  • Guides your successor trustee in the distribution of your estate
  • No income tax benefits
(Read more about this type of trust in Establishing A Revocable Living Trust.)

Irrevocable Trusts

  • You do not name yourself as trustee
  • Changes have to be approved by beneficiary
  • Assets can be removed from your estate
  • Taxes are typically filed as a separate identity
Life Insurance Trusts

  • Life insurance death benefits are assigned to this trust and the proceeds are distributed to the beneficiary, who is usually a spouse or child of the insured.
Marital Trusts

  • Provides transfer of assets to the surviving spouse, who then becomes in charge of the estate
  • Assets are subject to federal estate tax.
Special Needs Trusts

  • Provides income and principal to care for special needs, mentally ill or hospitalized individuals.
Charitable Lead Trusts

  • Passes assets to charitable organizations
  • Tax benefits go to the grantor of this trust.
Assigning the Appropriate Trustee
Your trustee(s) is the individual(s) that you assign to manage your property for the benefit of your beneficiaries. As grantor (or creator) of the trust document, you can name yourself or anyone of legal majority to act as trustee of the trust. If you list yourself as trustee, then you maintain full control over the trust, which allows you to make changes to it and to add or remove assets over time. These types of trusts are typically revocable in nature and give you a lot of freedom, but they also have very little asset protection or avoidance of both estate and income taxes.

The naming of the successor trustee is very important because this is the person who will be responsible for the distribution and safeguarding of your assets for your beneficiaries when you die (assuming that you were listed as the primary trustee). You should choose someone that you trust to handle your financial matters in an honest and competent capacity. It is wise practice to name the same person as your successor trustee, executor of your will and durable power of attorney for your financial matters. (For additional reading, refer to Can You Trust Your Trustee?)

The Rule Book
A trust is your "rule book" for the safeguard, distribution and control of your assets in the event of your death. With your power to elect a trustee, you give them the authority to act as an "agent" on your trust to ensure that your wishes are followed.

Since you set the rules, you can have your trustee distribute income monthly from the trust to your beneficiaries, and allow the trustee to distribute principal under certain occasions such as medical emergencies, education costs, home purchase or anything else that is of a legal nature. A trust document allows a lot of freedom, so you can be specific and creative, depending on the responsibility levels of your beneficiaries, if you desire this.

Re-Titling Assets
In order for a trust to be effective, you'll have to do your homework and retitle assets to the name of your trust. Common property that should be considered as trust property would include, but is not limited to:

  • Real estate and land
  • Jewelry, art and collectibles
  • Antiques, coins and stamps
  • Personal business interests
  • Stock in a closely held corporation
  • Copyrights and patents
Trust Benefits
As you've learned from above, setting up a trust can be a costly, time consuming and confusing process. However, if probate avoidance, care for your beneficiaries, donation to particular charities, asset protection, and estate taxes are some of your concerns then you might want to take the time to look further into an appropriate trust that could help you.

The probate process is known to take several months to settle an estate as well as being a costly process. Trusts can facilitate the longevity of assets for family generations as well as provide asset protection and tax benefits if used and set up properly. When completing your asset inventory, you should pay special attention to how that particular asset will pass upon your death. Assets that do not have particular beneficiaries named to them could pose a potential probate threat and might make a good case for trust implementation. (To learn more, read Should You Put Your Faith In A Trust?)

Advanced Estate Planning: Child Care Documents
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