A trust is an estate planning legal instrument that is used to avoid probate while also providing a benefit for a specific beneficiary or group of beneficiaries. While the requirements for forming a trust vary by state, the following are some general requirements:
- Settlor Capacity: In order to create a valid trust, the settlor must have the proper mental capacity to create the trust. What this means is that they must intend to create a trust that is expressed with any necessary formalities of the state, such as the trust being in writing;
- Identifiable Property: Trust property, or trust res, must be specifically identifiable. Meaning, there must be a sufficient enough description to know what property is to be held;
- Identifiable Beneficiary: The beneficiary or group of beneficiaries must be sufficiently identifiable, meaning that they must be able to be determined at the time the trust is formed. In the case of a charitable trust, this is often not a requirement; and
- Proper Trust Purpose: The trust being formed must be proper, meaning that it cannot be created for an illegal reason. An example of this would be how a person cannot create a spendthrift trust and hold the property in their own name for their benefit, simply to avoid creditors from reaching their assets.
Generally speaking, all trusts in the United States are presumed to be irrevocable, unless the trust instrument otherwise states that the trust is revocable. In Texas, Oklahoma, or California, trusts are generally presumed to be revocable unless they are specified as being irrevocable.
What Are Some Of The Most Common Types Of Trusts?
Some of the most common types of trusts include:
- Inter Vivos or Living Trust: A trust that is created while the settlor is still alive. An inter vivos trust is often designed to be revocable so that the settlor can add or remove property freely during their lifetime;
- Testamentary Trust: A common trust that is created through a will, and generally becomes effective upon the death of the trust creator;
- Charitable Trust: Created for the purpose of transferring and designating a person’s assets or property to a charitable organization, for the benefit of a particular charity or organization;
- Discretionary Trust: A trust that allows the trustee, the person who manages the trust property, to decide when and how the trust assets and property should be distributed to the named beneficiaries;
- Special Needs Trust: Created to provide for additional income for a person with disabilities but still allow the person to be able to receive government benefits. A special needs trust helps work around the issue of a gift or inheritance being included in the calculation of the person’s income for benefits;
- Spendthrift Trust: Created to provide for the needs of another person, while also preventing the beneficiary from accessing the trust property. Spendthrift trusts also protect a beneficiary from themselves by shielding them from their debts and creditors; and
- Land Trust: Trusts that allow a trustee to hold title to a specific piece of land or property, giving the trustee the power to manage the property, and make income distributions from the property.
In addition to all of these trusts, there are numerous other trusts that may be created for other purposes. Additionally, a trust may also contain characteristics of multiple trusts. An example of this would be how it is not uncommon for a trust to be an irrevocable, express, inter vivos, discretionary, spendthrift trust. This is why it is important to think carefully about the purpose for which you are creating the trust, as one or multiple trusts may be the best solution for your particular needs.
What Is A Family Trust?
Family trusts are generally considered to be revocable living trusts, because they can be changed within the grantor’s lifetime. The trustee manages the trust’s assets for the benefit of others; in the case of a family trust, the trust is set up to benefit the relatives of the grantor.
There are many benefits to establishing a family trust, such as:
- Control: The grantor can establish terms of the trust so that their wishes can be fulfilled, even after they become incapacitated or die. An example of this would be if a parent owns a sports car but does not want their newly-licensed teenager to drive the car in high-speed races. The parent can put the sports car in the family trust, and even if the parent passes away, the trustee will still fulfill their wishes and limit the use of their sports car;
- Avoiding Probate: To reiterate, probate is a legal process where a decedent’s estate is appropriately distributed by the court among their heirs. Any debts that the decedent has at the time of their death are also settled in probate. The probate process might apply to the decedent’s assets if they did not leave a will; if the will was unclear; if the will was not valid; or, if someone contests the will. Because probate can be a complicated process that requires significant time and money, many people arrange their assets in trusts in order to avoid those assets being subject to the probate process; or
- Preventing Payment of Estate Taxes: Estates may be worth enough money to qualify for federal estate taxes. As of 2019, the federal estate tax threshold is $11.4 million, meaning, a person may transfer (by will) up to $11.4 million in gifts before being subject to an estate tax. However, grantors may transfer assets into a trust so that they do not contribute to the $11.4 million estate. An example of this would be how if a grantor has an estate worth $15 million, the grantor can transfer $4 million into a family trust so that the estate is only worth $11 million. This estate does not exceed the federal minimum amount to qualify for estate taxes, and as such, would not be subject to the federal estate tax.
How Can Conflicts With A Family Trust Be Minimized?
Not every asset can or should go into a family trust. Some examples of what should be included are:
- Cash accounts, including checking and savings accounts;
- Investment accounts, except for 401ks;
- Personal property, including pets; and
- Real estate, including the family home, vacation homes, and/or commercial property.
Conflicts and disputes over money within a family may occur. There are several things that a grantor can do in order to minimize the risk of conflict:
- Constant Updates: A family trust should be reviewed and updated regularly. With marriages and divorces, births and deaths, there are numerous issues that could impact the family trust. A grantor should proactively update the trust when these major milestones happen, in order to ensure that there are as few conflicts as possible, especially when the grantor dies;
- Open Communication: Because misunderstanding is generally the root of many conflicts, communicating to family the grantor’s wishes while the grantor is still alive may help prevent family from disputing the grantor’s wishes when they die; and
- Determine The Grantor’s Goals: Some examples of understanding what the grantor’s goals are include: Does the grantor wish to simply avoid probate taxes? Does the grantor want to provide for a child after the grantor’s death? Does the grantor want to maintain control over assets after their death? Identifying the grantor’s goals will help ensure that a family trust is the best estate planning tool for the grantor.
Do I Need An Attorney To Create A Family Trust?
If you would like to create a family trust, you should work with an area living trust attorney. An experienced and local lawyer can help you understand your state’s specific laws regarding the matter, and can help you create and manage the appropriate trust instrument for your family’s specific needs.