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Do I Need A Trust?
Do I Need a Trust?
By: Attorney Amanda M. Fields
This is a common question we hear. Read on for information to help figure out whether you need a trust and, if so, what kind fits your specific situation.
For example, maybe you have a disabled child and you want a trust to permit that child to inherit without losing government benefits. Maybe your own or your spouse’s health is heading into difficulties, and you can foresee eventually needing long-term care benefits. Trusts can avoid an expensive, public, and lengthy probate process before your beneficiaries can inherit after you pass. Or, you might be in the classic “trust fund” situation, where you’re concerned that your children won’t be able to manage money wisely.
All these are excellent reasons to consider a trust. But what kind of trust?
Here’s the basic idea behind trusts, to help you understand why you might or might not need one.
What is a Trust?
Think of a trust like a treasure chest. You originally bought property or earned money in your own name. You then transfer those assets into the trust’s name – into your treasure chest, in other words. The trust treasure chest becomes a legal entity separate from you, which now holds your property in its, and no longer in your, name.
Then you identify people who will occupy the three roles involved in managing trust property. First, you are the grantor, or settlor, or trustmaker – all those words mean the same thing, the “you” in this case. Second, you appoint a trustee. That person or entity is responsible for managing trust assets and following directions contained in the trust document. Third, you decide whom you want to receive trust assets – your beneficiary or beneficiaries, in other words.
In legal terms, a trust is a fiduciary agreement among you the original property-owner, your trustee, and your beneficiary. The trust document contains instructions for what you want done with trust property, both for how you want it invested and, also, for how you want trust assets to be distributed when you pass. Trusts are, thus, a highly efficient hybrid between a power of attorney, an asset-management vehicle, and a last will and testament, all rolled into one legal entity and document.
There are two basic kinds of trusts: revocable or irrevocable trusts.
The Revocable Trust
A revocable trust can be thought of like the treasure chest with the open lid. As grantor/settlor/trustmaker of a revocable trust, you can get at trust assets freely.
You yourself can also occupy all three roles in a revocable trust – grantor, trustee, and beneficiary. If need be, you can also tinker with trust terms, by freely amending them to change the directions, beneficiaries, or trustees. Or, you can revoke the whole thing. Before that point, though, the trust document will be there to take care of everything you want it to.
If you should meet with an accident and lose capacity, the terms of your trust will designate a person to step in on your behalf and, thus, avoid the need to go to court to get a guardian for you. The trust will also direct who inherits, thus keeping your affairs private and out of probate court. This feature is especially important if you (formerly) and then the trust (after you created it) owns real property in various states. The savings in court costs in that situation could be significant.
The Irrevocable Trust
This is the trust for you if you’re seeing the need for Medicaid long-term care benefits in your future, or you work in a field where suits are common, such as owning a small business or in the construction industry.
The disadvantage to an irrevocable trust, however, is that you will be sacrificing all or almost all control over trust assets, unlike in the revocable-trust situation. Once an irrevocable trust is established, you as grantor/settlor/trustmaker cannot directly alter the terms and, generally speaking, your access to trust money is restricted or entirely precluded – as is required in order to enjoy the potent benefits of this kind of trust.
Think of an irrevocable trust as being like the treasure chest with the locked lid. Your trustee – who generally cannot be you – is the one with the key. You yourself can no longer reach your assets. This relinquishment of control is necessary to shelter your assets from creditors, or to protect your assets when entitlement to government benefits would otherwise require you to spend almost all you own first.
There are ways to draft an irrevocable trust carefully, so you can still exert your will over how assets are to be used. Just as in the revocable situation, you can impose conditions that must be met before a beneficiary can receive funds. You can designate how trust income is to be used for specific purposes like college tuition, business start-up, or travel. You can also authorize a person or entity as “trust protector,” who can alter trust language, correct drafting errors, or create a new similar trust if the law changes.
And there you have the basics. Now you’re ready to decide whether a trust is right for your estate planning needs!
Trust Your Attorney
Consult lawyers like us, who have experience and expertise in the trusts and estates area. Custom-constructing a treasure chest to fit your specific needs is a job for our specific skills.