Most people prefer to avoid thinking about their own mortality, but the decisions you make now regarding your estate will significantly impact the financial future of your loved ones. Life tends to throw unexpected obstacles our way, so taking a proactive approach to estate planning before you face serious health concerns or advanced age is crucial. An estate plan is the only way to ensure you have control over the handling of your assets and property after your death. Creating this plan with legal assistance from an experienced estate planning lawyer means your family members can receive their inheritance without having to deal with the time-consuming and expensive probate process.
One of the most valuable resources you can use within your estate plan is the formation of a trust. Learn more about how trusts work and their advantages by reviewing the information below, then contact Huber Fox today. Our team of experienced trust attorneys can help you craft a comprehensive plan to protect your estate and secure your family’s financial future.
What Is a Trust?
A trust refers to a legal arrangement in which an estate’s grantor appoints a trustee to hold their assets and distribute them to named beneficiaries. The grantor can create multiple trusts for specific family members and include conditions or restrictions on the distribution of the assets. For example, a trust can distribute assets in monthly installments or require the beneficiary to meet certain terms or reach a specific age before they can receive the assets. After the grantor creates a trust, they can begin diverting their assets into the trust right away, make deposits throughout their lifetime, or construct the trust so it becomes funded only after their death. When assets move into the trust, this action transfers ownership of the assets from the grantor to the trust itself.
An essential element of creating a trust is to find a trustee to oversee the distribution of assets. The trustee handles management of the administration of the trust according to the terms specified in the trust document. The trustee has a legally defined fiduciary duty during trust administration, which means they must act in the best interests of the trust and its beneficiaries. The grantor can also name a successor trustee, should the original trustee prove unable or unwilling to fulfil their duties in administering the trust.
What Is the Point of a Trust?
The point of a trust is to give you ultimate control over the way others manage, preserve, and distribute your estate after your death. It provides your loved ones with immediate access to the assets without requiring court involvement or forcing them to undergo the probate process. Probate is the court-supervised process of verifying a will, locating and valuing the assets of the estate, settling debts claimed by creditors, paying taxes, handling other remaining financial obligations, then finally distributing the assets to the beneficiaries named. A will only takes effect following your death and requires verification from the court before distributing any assets.
The terms will and trust often occur interchangeably, but these are different documents that serve different purposes for your estate. A will requires the probate process for the final allocation of assets, while a trust gives your beneficiaries the opportunity to receive their inheritance without court involvement. The trustee can begin distributing assets without probate or seeking other validation from the court, saving your family members a degree of stress, time, and money. When your loved ones are in the midst of the grieving process the last thing you want to do is force them to navigate an expensive, time-consuming court hearing.
How Does Trust Administration Work?
Trust administration is the process a trustee participates in to fulfill the legal responsibilities of their role of managing and distributing the assets within a trust. The grantor can specify that the trustee follow their instructions exactly as they are presented in the trust or allow the trustee to retain some decision-making abilities while distributing assets.
Regardless of the nature of the trust, trust administration involves a number of duties on the part of the trustee, including:
- Following the terms outlined in the trust for asset management.
- Collecting and organizing assets and property.
- Hiring an appraiser to value the assets.
- Notifying potential creditors that may have claims against the estate.
- Informing beneficiaries of their interest in the estate.
- Resolving any concerns or questions raised by beneficiaries.
- Paying debts against the estate.
- Filing tax returns for the estate and paying taxes on the assets.
- Managing or making investments.
- Overseeing any other financial obligations.
- Distributing assets to the proper beneficiaries.
- Keeping detailed records of any actions, such as income received from the trust, expenditures accrued, and distributions made to beneficiaries.
If a trustee withholds funds, violates the wishes of the grantor, or breaches their fiduciary duty, beneficiaries can initiate litigation against them with help from an experienced trust attorney. In these cases, the court will temporarily halt trust administration and investigate the trustee’s actions to determine if they adhere to the terms set forth in the trust. Violation of the trust’s terms can lead to the court ordering the trustee to make the necessary distributions. Alternatively, the court may remove the trustee from their role and replace them with a successor trustee. Due to the potential for disputes between trustees and beneficiaries, the grantor should always name a successor trustee.
What Are the Types of Trusts?
Trusts are available in two main forms—revocable and irrevocable. Revocable trusts, also known as living trusts, include the ability to change, amend, revoke, or cancel the trust at your discretion during any point in your lifetime. They also allow you to outline instructions for your care if you become disabled, comatose, or otherwise incapacitated and unable to handle your finances. The assets within a living trust remain your property and are therefore unprotected from collection efforts by creditors or estate taxes. At the time of your death, assets within the trust become subject to federal and state taxes. A revocable trust will automatically become irrevocable following your death.
Irrevocable trusts cannot be changed, amended, revoked, or canceled after their creation, barring extreme extenuating circumstances. Diverting your assets into an irrevocable trust amounts to surrendering ownership and control of the assets to the trustee, meaning you can no longer reclaim possession of them. Because you do not have direct access to the assets in an irrevocable trust, they are no longer your property and receive protection against any claims made by creditors. Creditors cannot legally pursue claims against the assets in the trust or any individuals you name as beneficiaries.
How Do Trust Funds Pay Out?
Trust funds pay out according to the instructions set forth by the grantor in the trust document. When a grantor creates a trust, they will not only name their beneficiaries, but also stipulate the intended method of distribution or how the trustee should disburse the assets within the trust. The ability to precisely control how beneficiaries receive assets and the amount of flexibility the process offers makes trust funds a popular choice for estate planning. However, the grantor must carefully consider their unique circumstances and family dynamics before making asset distribution decisions to make sure the process does not result in financial issues or conflict among family members.
A trustee can distribute trust assets to the named beneficiaries in three primary ways:
- Outright Distributions—The grantor can choose to distribute the trust directly after their death without placing any conditions or restrictions on the process. With the outright distribution method, the trustee can transfer funds by supplying cash or writing a check for the beneficiary from the estate’s funds. Similarly, the trustee can handle the transfer of real estate by creating a new deed or selling the property and turning over the proceeds. Although this method is straightforward and saves time, trust administration attorneys recommend only using outright distribution when the grantor is confident the beneficiaries will not misuse the funds by squandering them in a brief period.
- Staggered Distributions—The grantor can opt to use staggered distributions of assets instead of one direct distribution. Staggering the distributions requires the grantor to outline a set of conditions for distributing the assets according to a predetermined plan specified in the trust. They can instruct the trustee to distribute funds to beneficiaries according to a schedule—often on a monthly or yearly basis—or even following specific life events, such as when the beneficiary reaches their eighteenth birthday or marries.
- Discretionary Distributions—This option offers the trustee the highest degree of freedom during trust administration. In the discretionary distribution method, the grantor elects to provide the trustee with the authority to decide which assets beneficiaries will receive and when they will receive them. Discretionary distributions are most useful when beneficiaries demonstrate issues with money management or have special needs requiring additional financial aid which may change over time.
How Long Does It Take for a Trust Fund to Pay Out?
The amount of time beneficiaries can expect to wait before receiving distributions from a trust depends on the schedule of the distributions as well as the complexity of the estate. Before the trustee begins distributions, they must review the assets, have them appraised, settle outstanding debts, file tax returns, pay the taxes, and handle any other financial obligations. Large estates with sizable assets or debts will take longer to settle than smaller estates without outstanding creditor claims or complicated tax issues. Although a trustee may distribute assets contained in a trust without undergoing the probate process, beneficiaries may still wait several months to receive a distribution, or longer if they fail to meet certain legal conditions.
After the trustee appropriately distributes all funds from the trust according to the grantor’s wishes, the trust will be dissolved. A revocable trust created for the sole purpose of distributing assets after the grantor’s death often closes shortly afterward, while an irrevocable trust can remain in effect for years. The longer the trust stays open, the more maintenance it requires. Depending on the type of trust and the form of income or assets included, the beneficiaries may handle paying taxes. Usually, the beneficiary is exempt from paying taxes when funds come directly from the trust principal, but they may need to pay taxes on a trust’s earned income.
What Is the Benefit of Putting Money in a Trust?
Placing your assets into a trust supplies several benefits:
- Avoiding probate court. As mentioned above, creating only a will means your family must undergo the probate process before they can claim any of the assets you have left for them. This process is complicated, lengthy, and involves a variety of expenses. As a result, the larger or more complex your estate, the more expensive the probate process will be and the longer it will take to conclude. Owning property in several states can cause your family to face multiple probate processes, all with different requirements. At the end of a complex probate, your loved ones could end up paying up to tens of thousands of dollars from your estate before the trustee can even begin asset distribution.
- Retaining control of your estate. Placing your assets into a trust gives you ultimate control over how the trustee will manage your estate after your death. You can choose which family members to name as beneficiaries, designate specific assets for certain beneficiaries to receive, and decide exactly how you would like the trustee to distribute them. With a living trust, you can opt to distribute the assets in your estate right away, distribute them according to certain conditions, or leave the decision up to the discretion of the trustee. A trust allows you to make sure your children, grandchildren and other beneficiaries retain financial security and do not lose their inheritance because of creditor issues, substance abuse, divorce, or other challenges they may face as they grow older.
- Keeping your finances private. When a will undergoes probate, its contents become available for public disclosure, meaning anyone can learn the details of your estate. Details may include information such as your assets, your beneficiaries, and any outstanding debts you owe to creditors. The public nature of the process also makes your estate potentially vulnerable to estranged family members, greedy creditors, or other individuals and entities who may attempt to coerce the executor or otherwise defraud your estate. Placing your assets into a trust keeps your finances private and safeguards them against unnecessary risks.
What Are the Disadvantages of a Trust?
Most people find that the advantages of a trust far outweigh the disadvantages, but you should consider all factors when evaluating your estate planning options. The disadvantages of a living trust primarily involve an increase of paperwork over that of the will creation process, as well as additional initial expenses.
Compared to a will, which often involves drafting and signing in a single sitting, managing a trust requires more involvement on your part and more paperwork to complete. Creating a trust means shifting all relevant assets and property into the trust and ensuring that legal ownership of the assets transfers to the trustee. Any asset with a title, including real estate, vehicles, or stocks, must undergo a title change to transfer ownership. This process involves additional paperwork and record-keeping. You must maintain complete, accurate records of any actions involving the trust throughout its lifetime.
Establishing a trust is more expensive than creating a will. It requires an initial investment to set up, ongoing maintenance costs to administer, and costs associated with the transfer of titles as described above. You should also factor in attorney fees because the only way to ensure you create a legally sound trust is to hire the services of a trust lawyer. If you choose to appoint a bank or qualified trust company as the trustee, you will also have to pay these entities for their services in handling the trust.
Huber Fox Can Help Protect Your Estate
If you are interested in protecting the future of your estate, contact Huber Fox today to discuss how we can create a customized solution to secure the financial stability of your loved ones. With over a decade of experience, our dedicated team of attorneys offers in-depth legal knowledge, extensive resources, and trial-tested litigation skills to deliver the best outcome for you and your family. Because we specialize in estate planning and trust law, we can help you navigate every step of the estate planning process, including forming trusts to preserve your assets and ensuring their proper distribution after your death.
Contact Huber Fox today to schedule a consultation with our team by submitting the form on our website. Our team will work with you to assess your finances, determine your goals, and create a comprehensive estate plan that allows you to accomplish these goals. With our guidance and support, you can gain the confidence and peace of mind that comes with knowing your estate and the future of your loved ones are secure.