A trust is a separate legal entity that holds property or assets of some kind for the benefit of a specific person, group of people or organization known as the beneficiary or beneficiaries. The person creating a trust is called the grantor, donor or settlor. When a trust is established, an individual or corporate entity is designated to oversee or manage the assets in the trust. This individual or entity is called a trustee. A trustee can be a professional with financial knowledge, a relative or loyal friend or a corporation. There are pluses and minuses to each type of trustee. An individual trustee may provide a more personal touch, but may die or move away. A corporate trustee may be less personal but provides experience, investment skills, permanence and impartiality. More than one trustee can be named by the grantor if he or she wishes.
To provide for minor children or family members who lack financial experience or who are unable to manage their assets.
To provide for management of your assets should you become unable to oversee them yourself.
To avoid probate and transfer your assets immediately to your beneficiaries upon death.
To reduce estate taxes or provide liquid assets to help pay for them.
You should keep in mind that you might not need to establish a trust fund to accomplish these and other financial goals. A well written will may distribute your assets appropriately.
An after death trust fund will come into existence, usually by virtue of a will, after a person's death. The assets to fund these trusts must usually go through the probate process. In certain states they may be court-supervised even after the estate is closed. An example of an after death trust fund would be a mother leaving land to a trust benefiting a young son in her will. The will establishes the trust to which the land is transferred, to be administered by a trustee until the boy reaches a stated age, at which point the land is transferred to the son outright.
A living trust fund is a trust made while the person establishing the trust is still alive. In this case, a mother could establish a trust for her son during her lifetime, designating herself as trustee and her son as beneficiary. As the beneficiary, her son does not own the property but can receive income derived from it.
Living trust funds can be revocable or irrevocable. The most popular type of trust is the revocable living fund, which allows the individual to make changes to the trust during his or her lifetime. Revocable living trust funds avoid the often lengthy probate process but, by themselves, don't provide shelter for assets from federal or state estate taxes.
When an irrevocable living trust is set up, ownership of the assets is turned over to the trustee. The trust becomes, for tax purposes, a separate entity, and the assets cannot be removed, nor can changes be made by the grantor. This type of trust often is used by individuals with large estates to reduce estate taxes and avoid probate. However, if the grantor names himself or herself as trustee or is entitled to trust income, the tax benefits would generally be lost.
A charitable trust fund is used to make donations and realize tax savings for an estate. Typically, there is a transfer of property such as art or real estate to a trust that continues to hold the asset until it is transferred to the charity, usually after your death. The donor can continue to enjoy the use of the property, and then the charitable gift may be deductible for estate tax purposes.
A bypass trust fund allows a married couple, in certain cases, to shelter more of their estate from estate taxes. The first spouse to die can leave assets in a trust fund that can provide an income to the surviving spouse for the rest of his or her life, taking advantage of the unified credit provided under the Federal Gift and Estate Tax law. Upon the death of the second spouse, the assets in the trust pass directly to the children or other beneficiaries, without being taxes at the second spouse's death.
A spendthrift trust fund can be a good idea if your beneficiary is too young or does not have the mental capacity to handle money. The trust can be established so that the beneficiary receives small amounts of money at specified intervals. It is designed to prevent that person from squandering money or losing the principal in a bad investment.
A life insurance trust fund is often used to give your estate liquidity. In this case, the proceeds are payable to the trust and the trustee is empowered to lend money to or purchase assets from the estate.
How much a trustee is required to do and how much access he or she has to the funds should be specified in the trust fund. A simple of mandatory trust fund requires the trustee to distribute income to the beneficiary. A complex or discretionary trust may afford the trustee discretion over the principal and income to be distributed.
Generally, trustees are paid for their services because of the amount of work involved in managing a trust and the threat of potential liability if assets are mismanaged. Institutions such as banks or trust companies usually charge a percentage of the trust's value to handle the management of the trust. The percentage will vary depending upon the size and complexity of the trust. Individual trustees often receive a flat fee or hourly rate. Not matter how a trustee is to be paid, it should be agreed upon in advance.
If you want to name someone as a trustee, you should talk with that individual or entity about the trust. Be sure they agree to serve as trustee and can comply with the terms of the trust. Because there is generally such a high standard of duty and liability imposed on trustees, an individual or entity cannot be forced into becoming a trustee just because they were named in a trust document or will. If you designated trustee is unable or unwilling to perform, the court will appoint a trustee for you, unless a successor trustee, such as a corporate trustee is designate.
Resources:
WWW.CITIZENSFUNDS.COM
WWW.ETF.WI.GOV
WWW.SSA.GOV
A will is a document that allows you to legally leave property to people or an organization of your choosing. In a will, you also have the ability to name a guardian for your children as well as someone to manage any property or finances you leave your children if they are minors or unable to do so. Lastly, your will names an executor who has authority to ensure that your wishes are carried out and that the terms of your will are followed closely.
It is important to keep in mind that any property you leave in your will could be subject to probate court. Probate court proceedings could last anywhere from six months to a year and will cost the equivalent of about three to five percent of your estate in fees paid to the lawyer and court. This means that your beneficiaries will not receive the proceeds from your estate until probate is complete.
You may need something other than a will if you think you will have to pay estate taxes on your property, which will occur if your assets equal more than $1.5 million. Also, if your situation is somewhat complicated, such as wanting to leave property for you child, and then mandate that your children leave it to your grandchildren, you may consider a trust. Since most states give surviving spouses the control over property left behind, you might need a different legal document to leave assets to children from a prior marriage if you feel conflict may be involved between them and your current spouse. If you have a child with a disability or other special need, you may consider an estate plan that will address this issue.
There are a few instances where seeking the help of a lawyer would be beneficial. If you have a complicated family situation such as children from more than one marriage or ex-spouses or even same-sex partners, hiring a lawyer will ensure that your affairs are handled in the way you intended. Attorneys can also assess if a simple will is the best way to handle your individual situation. For example, if you have assets that equal more than $1.5 million, your assets will be subject to estate taxes and you may need to consider a different type of estate planning so your loved ones don't have to pay those taxes.
Having an attorney is also handy if you fear that someone close to you may contest what is in your will or even your mental competency in preparing it. Having an attorney will give validity to your requests.
If your state is one of the few that accepts holographic wills, then it does not need to be witnessed. A holographic will is one that is handwritten. These are recognized as legal in about 25 states. In order for a holographic will to be considered valid, it must be written in your handwriting and signed with your signature. Most states require that it be dated as well. Holographic wills will undergo much scrutiny in probate court to ensure that it is in fact legitimately your handwriting and signature. Be careful when writing a will on your own - the language should be very clear so that no questions about your intent are brought up.
There are a few steps you can take to see that your children are properly cared for in your will. First of all, name a custodian under the Uniform Transfers to Minors Act that will manage the property you are leaving to your child. Next, set up a trust for each of your children. You can use your will to create a trust for the property that each of your children inherit. In this case, you must list a trustee to manage the trust property until the child reaches an age of responsibility that you also specify. If you have more than one child, set up a pot trust where the trustee decides what resources each child needs and divides and spends the money accordingly.
If you wish to leave your assets to people other than your spouse or children, you must disinherit them. Most states have laws that protect surviving spouses from being completely shut out from receiving your assets. Some states, known as community property states, recognize that your spouse automatically owns half of all the earnings acquired while you were in your marriage. So in this case, you will be able to leave your half of the assets to anyone else you choose. In all other states, your spouse can legally dispute not receiving any of your estate, but must go to court to do so. It is a good idea to consult a lawyer if you aren't planning on leaving anything to your spouse. It is easier to disinherit your children - simply do not include them in the will. However, if it appears that you had a child after you created your will and they were intentionally left out, that child has the right to claim some of your assets.
When choosing an executor, select someone who will be inheriting a substantial portion of your estate. This way, you know that the person has incentive on handling the situation in the most conscientious way possible. Also, talk to the person you would like to be your executor to be sure that they feel comfortable with the task at hand and are willing to accept the responsibility.
Sources:
1. www.futureplanning101.com/estate-planning/types-of-wills.aspx
2. www.nolo.com