A trust is the legal relationship that is created when a person transfers property to a trustee with the understanding that the trustee will manage the property for the benefit of one or more beneficiaries. We use the term "property" here in its broadest sense; it includes both real property-such as land and buildings-and personal property-such as bank accounts, stocks and bonds, and personal effects. We call the person who transfers the property to the trustee the trustmaker.
NO. The trustee is bound by the trust instrument. You have final say over what the trust instrument says, and failure to abide by the trust instrument can make the trustee personally liable to the beneficiaries, including yourself. This means that if the trustee messes up, that person may have to pay for the mess out of his or her own pocket. Often, the trustmaker is the initial trustee. In that situation, the trustmaker does not have to worry about anyone questioning his or her management of the trust.
Once assets are transferred to the trustee, the trustmaker no longer holds legal title to them. If the trustmaker dies, the trust continues, and the successor trustee (who is named in the trust instrument) takes over administering the trust. Since a trust can't die the same way a person can, the trust assets will not be subject to probate upon the trustmaker's death.
Probate is the court proceeding to transfer a dead person's assets to the people who are supposed to get them. Simple in concept, but humbug in practice. Probate can easily take a year or more to complete, and the attorneys' fees and other costs associated with probate could easily eat up 5% or more of a decedent's gross estate. ("Decedent" is lawyer talk for a "dead person.") If a decedent owned assets located in more than one state or country, it may be necessary to have a probate in each jurisdiction where the assets are located. If one probate is bad, you can bet that more than one probate is worse. In addition to the money and time that probate can consume, another reason people try to avoid probate is that the court's probate files are public records. Nosy people can go through the court's probate files and gather all kinds of information that may be profitable to them-and detrimental to decedents' families.
A revocable living trust can avoid a conservatorship proceeding (sometimes called a "living probate") in the event the trustmaker loses the ability to handle assets. Ordinarily, if a person becomes incompetent, a court must appoint a conservator to administer the person's assets on his or her behalf. The conservator must then account to the court every year or so, and the whole conservatorship process can end up being extremely costly and time consuming. Not only that, but the documents in the court's file are a matter of public record. Anybody who so chooses could go down to the courthouse and find out personal information about you and your family and do who knows what with that information.
Trusts allow you to have control over your estate even after your death. If one of the beneficiaries is a minor, you will want your trust to hold on to that beneficiary's share of your estate until the beneficiary reaches the age when you believe he or she will be mature enough to handle it. Many clients choose to leave children's inheritances in trust during the children's entire lifetimes to provide them with creditor protection and to avoid estate taxation upon their deaths. Revocable living trusts can be used to provide incentives for beneficiaries. For example, you could say in your trust document that the Trustee will make distributions to a beneficiary only if he or she earns a college degree. Another type of incentive provision might be that the Trustee will match the income earned by the beneficiary, as evidenced by the W-2 forms provided by the beneficiary's employer for income tax purposes.
Remember that the trust instrument will govern only those assets which you actually place in your trust. The process of putting property into your trust is called funding. If you have a trust but fail to fund it fully by placing all of your assets in it, whatever assets remain outside the trust upon your death or incapacity may be subject to probate and/or conservatorship proceedings.
YES. First, what if you fail to have all of your assets transferred into your trust before your death? This could happen for a variety of reasons, some of which are beyond your control. Unless you have a so-called "pourover will" (one that says "please put everything into my trust") your non-trust assets will pass according to whatever law is in effect for people who do not have wills. A pourover will is essentially a safety net to catch your non-trust assets and pour them into your trust. Another reason to have a will even if you have a trust is that your will is where you typically name guardians for minor children (or incapacitated adult children or an incapacitated spouse). If you fail to name a guardian, the Court will pick somebody, and that somebody may not be your first choice.
In and of themselves, trusts do not avoid taxes, but they help to carry out good tax planning. As far as income taxes go, revocable living trusts are "tax neutral." During your lifetime, your trust will not need to file its own income tax returns. The taxpayer identification number for your trust is your Social Security Number, and you simply report all trust income on your individual Federal and State income tax returns.
Whether you have a trust or not, your estate may be subject to estate tax and generation-skipping transfer tax. The estate tax is a tax on your failure to spend your last nickel by the same time as you exhale your last breath. If you are a U.S. resident, the law gives you an exclusion from the Federal estate tax (we like to call it your estate tax "coupon") that enables you to shelter a certain amount of assets from the tax. The aptly-named generation-skipping transfer tax ("GST") is piled on top of any applicable gift or estate taxes on transfers to individuals who are two or more generations younger than you and can result in a lot more going to the IRS than goes to your loved ones.
A will deals with assets, whereas a living will deals with medical care. Many States have done away with the so-called living will and replaced it with the advance health-care directive ("AHCD"). An AHCD can accomplish a variety of objectives, from saying who will make health care decisions for you if you cannot communicate with your doctors, to saying under what circumstances conventional health care will be withheld from you so that nature will be allowed to take its course.
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