Estate planning is a process by which an individual designates how their estate should be distributed upon their death. An individual’s estate consists of all of their property and may include:
- Personal items;
- Bank accounts;
- Real estate;
- Stocks and securities; and
- Other assets.
An estate plan includes guidelines for how the individual’s property is to be managed and distributed when they pass away. A comprehensive estate plan can lighten the tax burden which is left to loved ones who inherit assets as well as reduce the need for a probate proceeding.
If an individual does not have an estate plan in place, their assets will be distributed according to the intestate succession laws in their state. These laws vary by state and may result in a property distribution which is not in accordance with the wishes of the individual who passed away.
When an individual passes away without having a will, it is called intestacy. In these cases, the individual is said to have died intestate.
Total intestacy occurs when an individual passes away with no valid will. Partial intestacy occurs when an individual’s will does not dispose of all of their property.
Every state has different laws regarding intestacy. In most states, the spouse has the first rights, followed by the individual’s children. If the individual had no children, the next in line are the individual’s parents.
If their parents are not alive, the next in line to inherit would be any siblings. If there are no siblings, property would pass to the individual’s nieces or nephews.
If an individual passes away without any close family members, the next of kin, or the closest descendant on the family tree, typically inherits. If there are no eligible family members, the property will escheat, which means it goes to the state. This is one reason why many individuals ensure they have a will.
What is a Trust?
Estate planning includes many legal instruments, including wills and trusts. A trust is an estate planning tool in which a property interest is held by a trustee. This property is held at the request of another individual, called the settlor.
The property is held for the benefit of a third individual, called a beneficiary. A trustee is legally obligated to administer the property in the trust for the benefit of the beneficiary or beneficiaries. Once the trust has been created, the trustee has a fiduciary duty to act in the best interests of the trust as well as the recipients, or beneficiaries.
A trust may be utilized in a variety of ways. Trusts are most commonly used because they are flexible. In addition, they do not require the formalities which are required to make a legally valid will. Trusts can also be useful for asset protection and tax planning.
One important step for an individual is to determine what type of trust they wish to create. A trust may be revocable or irrevocable. A revocable trust can be revoked or altered by the creator after it is formed.
An irrevocable trust, however, cannot be altered once it is formed. In general, unless the terms of the trust specific state that a trust is irrevocable, a trust is typically considered to be revocable.
There are numerous different types of trusts. A charitable trust is a trust which is created to collect funds or property for the benefit of a charity or for the public good. A testamentary trust is a trust which is included in an individual’s will and takes effect after they pass away.
A trust has many benefits and may be advantageous in situations including:
- When a beneficiary is not of legal age or is not emotionally mature enough to receive the funds or property;
- Certain tax advantages for the individual’s estate which arise from holding the property in a trust;
- There may be a condition placed on the trust that the beneficiary must fulfill before they can receive the trust property, such as graduating from college;
- Having greater accountability for an individual’s funds or property that they place into a trust, allowing them to have an organized record of financial transactions.
What are the Requirements for a Valid Trust?
In order for a trust to be legally valid, there are certain requirements which must be met, including:
- A trustee; and
- A beneficiary.
The settlor of a trust must have the intent to immediately create the trust. Language which is used to convey a hope or a desire for a trust to be created in the future violates the intent requirement and does not create a legally valid trust.
Trusts are intended to distribute assets, therefore, a valid trust requires a presently existing interest in property which presently exists. For example, a trust cannot be composed of profits which result from trading certain stocks.
A specific individual must be designated to serve as the trustee and to hold legal title to the trust property while managing the assets in the trust. If, however, the settlor does not designate a trustee before they pass away, it will not necessarily invalidate the trust. Courts will typically designate a trustee if one was not specified.
The settlor must designate a beneficiary or beneficiaries for the property held in the trust. These beneficiaries will receive the property or benefits which are included in the trust assets.
To further expand upon the previously noted requirements:
- There must be a trust creator, or settlor;
- The settlor is required deliver legal title to the property;
- The property is required to be delivered to a trustee;
- The trustee is required to hold legal title to the property;
- The legal title is held for the benefit of one or multiple beneficiaries;
- There must be the intent to create a trust;
- The trust is required to be created for a lawful purpose; and
- The document which embodies the trust is required to be executed in a valid manner.
What Else Should be Considered When Drafting a Trust?
There are many issues which should be considered when drafting a trust. There are different types of trusts which are available to meet different needs of an individual.
An express trust is intentionally created in order for a trust creator to distribute property or funds to a trustee. A trustee holds the funds or property in trust, subject to the rights of the beneficiary of the trust.
An express trust may be further subcategorized as a lifetime trust or a testamentary trust. A lifetime trust, also called an inter vivos trust, is created during the lifetime of the settlor. A testamentary trust, on the other hand, is typically created upon the death of the settlor, which is usually done by instructions contained in the individual’s will.
The requirements for a specific trust may also involve various other details. These details may include, but are not limited to:
- A settlor can typically be any individual. However, some states have an age requirement;
- The trust property must be formally transferred to the trustee in order for the delivery to be valid;
- Trust property can be either personal or real, as long as the settlor actually owns the property;
- The trust must have a named trustee. If this was not done, the court will appoint a trustee;
- A trust must have one or multiple beneficiaries; and
- A trust is not permitted to be created for an unlawful purpose.
Do I Need an Attorney for Drafting a Trust?
It is necessary to have the assistance of a trust attorney if you desire to draft a trust. Your attorney can review your assets and help you ensure that your estate planning goals are met.
Your attorney can also explain the different types of available trusts, their requirements, and how they may assist you properly distribute your property and minimize your tax liability. Your lawyer will assist you with all aspects of drafting and executing the documents necessary to create your personalized estate plan.