Trust and Estate Administration

Is a trust right for you?

Ever since people began to accumulate wealth in the form of money and property, the more foresighted among them have looked for ways to protect and pass on what they have accumulated and acquired to their family members or others of their choosing. Over time societies have created a number of vehicles to offer more flexibility to you when it comes to estate planning, two of the most common being wills and trusts. In this article, we’ll take a closer look at some types of trusts that you can use to ensure that the government and everyone else respects your intentions for your estate.

The average person generally has little experience dealing with trust and/or estate administration.  Because of this lack of experience, most individuals have many questions upon becoming a trustee or Personal representative for the first time. Through our experience in helping clients with trust and estate administration, our skilled elder law attorneys have found that many individuals have unreasonable expectations concerning the way revocable trusts operate following the death of a loved one.

What is a trust?

A trust is similar to a will in that both are legal instruments that enable you to direct how direct the disposition of your estate’s assets to benefit people of your choosing. The main difference between the two is that a will only takes effect after your death, while a trust can operate during your lifetime. A related difference is that a trust is not subject to probate laws, like a will can be.

Why would I consider using a trust?

Aside from its advantages over a will, using a trust to manage your assets offers other beneficial and problem-solving possibilities. Consider the following situations:

  • You want to leave something behind for a child of yours, but are concerned that he or she may not be financially responsible enough to not squander a gift or inheritance. A trust can preserve its assets by preventing such a beneficiary from being able to get at them directly.
  • You want to provide for someone with special needs, such as a physical or mental disability, but worry that he or she will not be able to manage the assets you want to provide for his or her care.
  • You want to provide for your spouse after you die, but are concerned about the effect of estate taxes on what you want to leave to him or her.
  • You want to minimize the expenses, publicity and time delays that going through probate can entail.
  • You want to protect high-value assets in your estate from potential loss through legal liability, while retaining the ability to use and control those assets.

There are types of trusts you can use for each of these circumstances, and more. We’ll discuss specific kinds of trusts a little later on, but first let’s see how you create a trust.

Elements of a valid trust

To establish a trust, you need to satisfy the following basic requirements:

  1. You need a grantor. This is you. As grantor, you will decide what assets to put into the trust.
  2. You need a beneficiary. Actually, you should be thinking of two: the first is is the person you want to receive income benefits from the trust. When that beneficiary dies, the secondary beneficiary is the person you direct the remainder of the trust goes to.
  3. You need assets to put into the trust. This can be real property, financial accounts, money or personal property that you want to provide for your trust beneficiary.
  4. You need someone to manage the trust. This person is the “trustee.” You can be your own trustee in a revocable living trust, or you can designate someone else. The trustee can also be a legal entity, like a company. The trustee acts as your agent in handling the trust assets for the beneficiary. Note that it is often a good idea to select an additional person to serve as a backup trustee if the initial trustee becomes unavailable for any reason; this person is a “successor trustee.”

What are some types of trusts that I can create?

One of the major advantages of using a trust as an estate planning tool is that you have tremendous flexibility in the type of trust that you can set up. We’ll consider here the basic forms that your trust can take, and then take a deeper look at some of the many variations you can use to match your particular objectives.

Basic types of trusts

You can categorize trusts into two basic forms: a “testamentary trust” which becomes effective upon your death, and a “living trust,” which as the name suggests is one that operates while you are alive.

Testamentary trusts

“But wait,” you might be thinking, “Isn’t a testamentary trust effectively the same thing as a will?” There are some similarities between these two devices, but also some key differences as well:

  • You can use both a will and a testamentary trust as part of a comprehensive estate planning package. If fact, a “pour-over” will that catches property you meant to include in your trust but for some reason didn’t do so is highly advisable to have in tandem with a trust. You still need to consider carefully what property to allocate to the trust. Property you devise through a will can only be property that you own by yourself (you cannot devise trust property in your will). A trust, on the other hand, can only control property that you sign over to it.
  • In addition to avoiding probate, another advantage of a testamentary trust over a will is that the administration of the trust is a private matter while probate is a matter of public record.
  • You can perform certain legal actions through a will that you cannot with a trust, such as naming a guardian for your children.

Living trusts

A living trust works like a will in that you can direct what happens to the trust assets on your death, but the trust is effective while you are alive: you can transfer assets to the trust during your lifetime.

Living trusts break down further into two types: irrevocable, and revocable.

  • With an irrevocable living trust, once you transfer ownership of the property to the trust the only way for you to get it back or to make any other changes is to obtain the approval of both the trustee and the beneficiary. On the positive side, property held in an irrevocable trust is not usually attributable to you for tax purposes, and can be better shielded against seizure if you experience a bankruptcy or go through a divorce.
  • The revocable living trust is perhaps the most common type of trust. It provides you with more flexibility than an irrevocable living trust, at the cost of some of the advantages that an irrevocable living trust offers (particularly some it its tax avoidance benefits, although it can still be an effective means of minimizing estate taxes). Because you can be the trustee of a revocable trust, adapting to changed conditions is comparatively simple, up to and including termination of the trust itself.

While it is true that a revocable trust (Living Trust) in many cases drastically reduces the costs and delays involved in passing on assets at death. A revocable trust accomplishes this feat only if it is properly drafted and correctly funded.  If it is not properly drafted or funded correctly the trust may not avoid Probate. Unlike a will, a trust is a private document and generally does not need to be filed with the probate court.

Nonetheless, the successor trustee, just like a personal representative, must still take the following steps to administer the trust:

  • Beneficiaries must be contacted and kept informed;
  • The trust-maker’s assets gathered and invested;
  • Any debts paid;
  • Potential creditors notified;
  • Taxes filed and paid;
  • Assets and/or income distributed in conformity with trust provisions to beneficiaries, etc.

What are some other types of trusts?

Some of the variations of trusts you can use include marital trusts, special needs trusts, charitable lead and charitable remainder trusts, credit shelter trusts, IRA trusts, qualified terminable interest property trusts, spendthrift trusts, tax bypass trusts, generation-skipping trusts, life insurance trusts, Totten trusts, even constructive trusts.

We don’t have the space in this article to explain all of the kinds of trusts that you can use, and clearly not all trusts are appropriate for all occasions. The best thing you can do if you want to know more about what specific trust is suitable for your individual needs is to consult with an attorney familiar with the laws concerning trusts, wills and estates.

Is creating a trust hard to do?

Your attorney can help you to create the combination of estate planning tools that are the best fit for you, including not only trusts but also a will and if need be additional instruments like a power of attorney or a health care directive. Depending on the complexity of your requirements, the costs involved can be a substantial investment of time and money. Considering the possible disadvantages inherent in not taking advantage of a trust, such as having to endure the costs, delays, lack of privacy and lack of control involved with probate, in many if not most cases your efforts will still be worthwhile not only for you, but for those you intend to benefit.

Contact an Experienced Living Trust Attorney

Successor trustees or personal representatives often lack the time, resources or knowledge to personally administer the trust or estate, and therefore may call upon legal, accounting and investment professionals for assistance in trust and estate administration.  The lawyers of Schock Solaiman Ramdayal PLLC can help personal representatives or successor trustee(s) deal with the complexities of trust and estate administration in Michigan. Contact us at 586-239-0871 or online today!