In some of my past articles, we talked about how estate planning is important for everyone - from people of the most modest means to those with great wealth. Whatever your assets, you can control them now, in life, and later, after death, with careful planning. You can assure that your partner, spouse or family (even pets!) are protected to the best of your ability when you use the right estate planning tools.
Trusts are the backbone of most estate plans, so let’s review some of the most common types of trusts, and see how they work:
A trust is really the right to enjoy a beneficial interest in specific property (real estate,furnishings, investments, bank accounts or other defined assets) when the legal title to hat property is held by another person. That person is called the grantor or settlor, and chooses who the beneficiaries will be. The grantor may act as trustee of the trust, holding and managing the assets personally, or may appoint a third person or entity (such as a bank) to act as trustee.
Once created, some trusts can be changed or terminated by the trustee. These are called revocable trusts, and are among the most commonly used by people who want to maintain full control of all assets during their lifetimes. Other trusts are irrevocable - they remain just as they were created and cannot be changed or ended. These trusts are often designed to reduce tax burdens or take care of special needs of the grantor or family members.
Revocable Living Trust: Often called a “living trust,” this type of trust is commonly used by single people, couples and families to avoid probate court and to ensure a smooth transfer of property if the grantor becomes incapacitated or dies. It is an inter vivos trust, which means it is created and takes effect during the grantor’s lifetime.
The trust must be “funded,” which means all of your assets such as a home, bank accounts and investments must be transferred into the name of the trust. Unfortunately, people often create a living trust, then fail to fund it. It can happen to anyone - even Michael Jackson’s estate was thrown into the probate courts because his trust wasn’t adequately funded.
A living trust is a flexible and powerful tool that makes good sense for anyone who has any real property or investments that they want to be sure are managed properly both during and after their lifetimes. Just be sure the trust is funded, and review it regularly to keep it up to date.
Testamentary Trust: A trust that is created by a Will, and takes effect upon your death. For example, your Will might provide for a trust to manage the assets you leave to your children, rather than giving them the assets outright. Such trusts are irrevocable and can’t be changed or terminated by the trustee.
Life Insurance Trust: An irrevocable trust which is both owner and beneficiary of life insurance policies. It is designed to avoid having life insurance proceeds included in the general estate, which may be subject to federal or state estate taxes.
Charitable Trust: A trust that is designed to benefit a specific charity or the general public rather than a private individual or entity. There are often tax benefits to holding assets in a charitable trust.
There are many variations of the above types of trusts, most of which are designed to minimize taxes or protect the assets from creditors. A trust can be created to accomplish almost any result that a grantor wants, as long as it is done for a lawful purpose.
Here are a few more trusts that are interesting:
Blind Trust: A grantor may place investments under the control of an independent trustee, so the beneficiary (who may be the grantor) has no knowledge or control over the assets. This type of trust is often used when government officials or others in sensitive positions want to avoid conflicts of interest.
Spendthrift Trust: A trust created to set aside property for a beneficiary who may be unable or unwilling to properly manage the assets. A trustee manages the assets, and may distribute some assets to the beneficiary as needed. Creditors cannot access the assets until they are actually received from the trustee by the beneficiary.
Honorary Trust: A non-charitable trust that has no beneficiary capable of enforcing the trust. As an example, many states now recognize pet trusts, which are created to provide care and support of specific domestic animals after the owner’s death.
BYTAG
This article is part of an ongoing series of articles pertaining to legal issues in the LGBT community. Previous articles can be viewed at www.heritagelegal.com. This information is intended for general information purposes only, and is not intended to provide legal advice. Christopher Heritage is an attorney in Palm Springs, CA, who focuses on estate planning, domestic partnerships, same-sex marriage, probate, trust administration, and consumer bankruptcy. He welcomes questions and comments, and can be contacted at 760.325.2020, or by email: chris@heritagelegal.com