Many attorneys will recommend that people use trusts instead of wills when planning for their estate at death. However, others say that a trust isn't for everyone. It's easy for people to get confused as to whether to set up a trust or not.
Is a trust right for your situation? It'll help you to know the basics of trusts to determine whether one will work for you.
Q: What's a trust?
A: A trust is a legal agreement for a trustee to hold certain property for the benefit of others. The trustee is the person or company that manages the trust. A living trust is one that's created while the property owner is alive. Many people only have a trust created at death to distribute their property to their heirs. This is called a testamentary trust. Some people use a will as well as a trust to distribute their property. They may use the trust to transfer property that has a title, such as a car or a house, and use the will to transfer all other property.
Q: Is there an advantage in using a trust instead of a will?
A: The main advantage is that a trust will usually allow you to avoid probate. Probate is the legal process in which assets are transferred and debts are paid off. The process can be very expensive and can take a long time.
There are some other advantages as well. They include:
- A trust has the ability to cover certain things that a will can't cover. Examples include retirement accounts, jointly owned property and life insurance policies.
- A will becomes public after the property owner dies. However, a trust stays private. Only the beneficiaries and the trustee are informed of the trust. A trust may be less likely to be contested since it's not public.
- A trust has the advantage of being more flexible than a will. This ability can help people who have complicated relationships. An example is someone who has many children from multiple marriages.
- A trust doesn't have to transfer all the property at once. It has the ability to transfer property over time. A parent could set up a trust to take care of the bills of a disabled child without burdening him with all the money at once. Also, a parent may not want to give a large amount of money to a young child, teenager or even a young adult, since he doesn't have the maturity to handle the money. A trust can transfer enough money a month to live on until the child reaches adulthood or can handle it.
- A trust may be used to avoid estate taxes. These taxes can be expensive. The government may take up to 55 percent of a person's inheritance.
Q: Are there any disadvantages in using a trust?
A: A trust may take longer to create than a will and can be more expensive. This is because trusts are usually more complicated than a basic will. However, it can save money in the long run.
You should compare the cost of a will with the cost of a trust before any decision is made as to which one to use. You should also determine how much it'll cost to distribute your property through probate. This may include taxes, court fees and lawyer's fees. A lawyer will be able to help you determine all the costs of both options.
You should always work with a lawyer when setting up a trust. A poorly created trust can be confusing, expensive or even ineffective.
Q: What's the difference between a revocable trust and an irrevocable trust?
A: A revocable trust is a trust that allows the person who set it up to revoke it or change it at any time. If the person dies, the trust will normally become an irrevocable trust. If that happens, no one can change the trust. A trust can also be made irrevocable while the person is alive in certain circumstances.
Q: Are there different types of trusts?
A: There are different types of trusts. One type is called a basic living trust. This trust allows the transfer of property without the probate process. However, this trust can't be used to lower estate taxes. Another type of trust that can reduce taxes is called an AB trust. This trust can be used by married couples to pass their property to their children. As long as one of the parents is living, he or she can use the trust property. The property isn't subject to estate taxes when the surviving spouse dies.
Tax laws can affect each trust differently. You should research which trust will save you the most money.
Q: How is a trust set up?
A: If you set up a trust, you are called the trustor. You'll need to decide who will manage the trust. You can be the trustee if you want until you die. A successor trustee should be chosen in case you become incapacitated.
After the trust provisions are set up, the property needs to be transferred to the trust. This is done by transferring ownership to the trustee. It may take a couple of months for all the property to be transferred.