Depending on the value of your estate and your estate-planning goals, a trust can be a great alternative to using your will to give away property. When you set up a trust, you create a new legal entity to hold assets for the trust's beneficiaries. To create the trust, you prepare a trust agreement. At a minimum, the agreement should indicate the following:
- The names of its beneficiary or beneficiaries
- The name of its trustee and substitute trustee
- The trustee's rights and responsibilities
- Your desires regarding how you want the trustee to invest the trust assets
- When and under what conditions you want the trustee to disburse income from the trust to the trust's beneficiaries
- When the trustee should give full control of trust assets to its beneficiaries
A trust is a very complicated legal entity. Do not try to set one up without the help of an estate attorney!
 | If someone tries to sell you a living or inter vivos trust, check out the salesperson or company very carefully. Bogus salespeople and companies may try to scare you into purchasing a trust or claim that it's a panacea for all your estate-planning needs. Steer clear of anyone who tries to sell you a fill-in-the-blanks living trust. If you want a living trust, your best bet is to work with a reputable estate attorney. |
Trusts are popular for many good reasons, especially because they are the most flexible of all estate-planning tools. You can set one up to do just about anything as long as it's legal. No other estate planning tool gives you as much control over the terms of your gift. For example, you can decide if and when the beneficiaries of your trust will receive income from it and when a beneficiary can take possession of the trust assets. You're the boss!
To help illustrate these advantages, here are some examples of why you might set up a trust:
- If you and your spouse were to die, your minor children will end up inheriting a considerable amount of property. You don't want them to automatically take possession of that property when they turn 18 or 21 as they would if you left them the same property in your will (or in a custodial account, depending on your state), nor do you want a property guardian to manage your children's inheritance.
- Your husband is a poor money manager and you're concerned that if you were to die first, he would quickly squander the property he will inherit from you.
- Your child is profoundly handicapped and unable to earn a living. You want to ensure that after you die, your child's financial needs will be taken care of without jeopardizing any public assistance he or she may be receiving.
- You are seriously ill, and although death is not imminent, you know that at some point, you will no longer be able to manage your own financial affairs. You therefore establish a trust naming yourself both trustee and beneficiary and also designating a co-trustee. While you're still able, you manage the trust assets, and when you become too ill, the co-trustee will take over management of the trust property according to the directions you spell out in the trust agreement.
- You've just remarried. Although you want to leave most of your property to your new wife, you want to be sure that when she dies, certain property goes to the children from your first marriage, not to the children from her former marriage.
- You own a closely-held business and want to do what you can to ensure that when you die, your family won't experience an interruption in the income it provides.
- You want to leave all of your property to your spouse. Because your estate is worth more than $600,000, you are concerned with estate taxes and understand the limitations of the unlimited marital tax deduction.
With the help of an experienced attorney, you can set up a trust to address each of these and many, many more situations.
Types of trusts
Two basic kinds of trusts are available: testamentary trusts and living trusts. Each has its own pros and cons.
Testamentary trust
Easy and relatively inexpensive to set up, this kind of trust is actually part of your will. While you're alive, a testamentary trust exists only on paper. After you die, however, the trust is activated, and after the assets you've earmarked for it go through probate, they are placed in the trust. Because a testamentary trust does not come into existence until you die, it is always irrevocable after that point. But while you're alive, just as you can revoke or change your will, you can revoke or amend any testamentary trusts you include in your will.
Many parents use testamentary trusts to help provide for their young children. Also, people with substantial estates often use testamentary trusts to minimize their estate taxes and to help protect their property from creditor claims.
Living trust
This kind of trust takes effect while you're still alive — thus the name. Any assets you place in it become the property of the person you've designated as trustee. You no longer own them. In some states, however, you can name yourself as trustee. That way, you get to control the trust's assets. There's a trade-off, however: If you're the trustee, the IRS expects you to report any trust income on your personal tax return.
Living trusts can be revocable or irrevocable. Most are revocable, which means that you can add or remove assets from the trust whenever you want, or you can even terminate the trust. Although a revocable living trust does not provide your estate with tax advantages or protect it from your creditors, an irrevocable living trust does. Both kinds of living trusts avoid probate.
| In some states, a living trust is assumed to be irrevocable unless the trust agreement states that it is revocable. |
The expense of trusts
Given the additional expenses associated with establishing a living trust, it's not a practical estate-planning tool for everyone, and certainly not appropriate if your estate is very small. For example, you have to pay an attorney at least $1,000 to help you set up a living trust, and you incur additional costs transferring ownership of trust assets to the trustee. Also, the trustee of a living trust (and of a testamentary trust) is entitled to receive a fee for his or her services.
 | Assets you place in an irrevocable trust are treated as inter vivos gifts, so be sure that you don't exceed your annual $10,000-per-person gift maximum. If you do, your estate will have to pay taxes on the excess amount. |
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