Updated: Oct 5, 2022
Trust Basics and Advantages of Trusts
One of the most frequent estate planning questions I hear is “Do I need a Trust?” A trust can be effective estate planning tool, but it is important to understand basics of trusts, how they work, and whether a trust makes sense for your specific situation.
What is a Trust?
A trust is written agreement wherein a separate entity, the trust, holds title of property and assets and manages those assets on behalf of an individual. A trust is created by a settlor (also known as the “trustor” or “grantor”) and the assets of the trust are managed by a trustee for the benefit of the beneficiary.
As an initial matter there are two general types of trusts: revocable living trusts (often called simply “Living Trusts”) and irrevocable trusts. Within these types of trusts there are numerous variations in techniques and complexity, but it is important to at least understand the basic distinction between a revocable and irrevocable trust.
A revocable living trust is a type of trust that can be amended or terminated at any point by the settlor during his or her lifetime. Typically, during the settlor's lifetime, the settlor is also the trustee and the beneficiary, so he or she retains complete control over the trust. It is only usually during the settlor's death or incapacity that a successor trustee would step in and act on behalf of the trust.
An irrevocable trust is a trust that, once executed, cannot be amended, or terminated without court approval or consent of all the beneficiaries. Once the assets are transferred to an irrevocable trust the settlor no longer retains control of those assets. Irrevocable trusts can be important tools for estate tax planning or creditor protection purposes. However, because they are irrevocable, the decision to execute an irrevocable trust depends on your specific tax and estate plan and should be discussed carefully with your attorney or tax advisor.
For purposes of this article, the focus is on revocable trusts as they are more commonly applicable. Understanding the basic definition and types of trusts is important, but what are the advantages of a trust versus creating a simple will?
Advantages of a Trust
A significant benefit of a trust is the ability to have greater control of the distribution of your assets. A trust allows you to set out exactly when, where, and how much each of your beneficiaries will receive from your estate, over time, rather than requiring immediate distribution of your entire estate. For example, if you wanted to leave your estate equally to your two children, but wanted to ensure that they did not receive all of their inheritance at once you could specify in your trust that each of your children receive a percentage of your estate upon reaching a certain age, or achieving a certain life milestone.
Probate is a court proceeding whereby your personal representative (also called an “executor”) is responsible for gathering your assets, paying debts and expenses, and distributing your property either pursuant to your last will and testament, or by state law if no will is in place. In Montana, the probate proceeding takes a minimum of six months before closing and distribution. However, with a trust, distributions can occur more quickly, privately, and without the costs associated with a probate court proceeding.
As mentioned above, probate is a public process. Probate requires filing an inventory listing all your assets with the court as well as filing the original last will and testament which sets out your plan of distribution. A trust, on the other hand, allows for the private distribution of your assets.
Reduce Potential Conflict
Because trusts are private documents not subject to probate proceedings, the use of a trust can help to reduce the potential for conflict surrounding your estate. While the purpose of a probate proceeding is intended to be administrative rather than adversarial in nature, probate does provide a forum for heirs to contest terms of your will or dispute with other heirs and beneficiaries.
A trust is a great mechanism for ensuring that your property will be managed for your benefit during any period of incapacity or prolonged mental or physical illness. The terms of your trust can set out how to determine your incapacity, who is responsible for managing your assets, and how the assets should be managed upon a disability.
Planning for Second Marriages & Minimizing Estate Tax
A revocable trust does not necessarily eliminate estate taxes but a trust can assist in utilizing the unlimited marital deduction and maximizing the estate tax exemption available to an estate. For example, you may decide to create a Qualified Terminable Interest Trust ( a “QTIP”) within your revocable trust, which can provide income to a surviving spouse while qualifying for the unlimited martial deduction, and providing for the distribution of the remainder of trust assets to children from a prior marriage.
Caring for a Family Member with a Disability
If you have someone in your family with a disability, special needs, or who receives any type of disability benefits, they could risk losing these benefits if they inherit from your estate. A trust can provide for the basic needs of a disabled beneficiary while also maintaining their current benefits and care.
Disadvantages of Trusts
While trusts can be beneficial estate planning tools, they are not necessarily the best tool for everyone. If you have a simple estate, both in the type of assets and value, a trust may not be necessary to accomplish your estate planning goals. The two main disadvantages of trusts are the cost and administration.
Trusts typically cost significantly more to create and administer than an estate plan with only a will. Often a trust will cost three to four times as much as a basic will, depending on the complexity.
For a trust to be effective the settlor’s assets must be re-titled in the name of the trust, or otherwise transferred to the trust. This means that upon initially executing a trust you would have to execute deeds for any real property to your trust and change bank and other financial accounts. While this often is accomplished upon initial execution of a trust, for some people the administration of a trust is enough to be a deterrent.
Seek Advice from a Trust Attorney
Trusts can be very effective estate planning tools if properly executed and funded. However, trusts do not make sense for everyone. It is important to consider your assets, family situation, and personal preferences carefully before proceeding with a trust. Trust can also vary greatly in type, terms, and complexity. It is essential that you review your situation with your attorney and tax advisers to determine the type of trust that is right for you and your family.
If you have questions about trusts and estate planning, contact Kelly O’Brien, Montana Estate and Trust Attorney at Measure Law, P.C. www.measurelaw.com (406) 752-6373.