An Essential Guide to Trusts in Estate Planning

Trusts can be important parts of estate plans, allowing grantors (i.e., the people who have developed the trusts) to transfer certain assets to their loved ones according to specific wishes.

Highlighting the role and significance of trusts in estate planning, the following guide reveals the benefits of trusts, along with some important information about different types of trusts, developing trusts and administering trusts.

Reasons to Develop  a Trust: Top 3 Benefits of Trusts 

There can be various benefits to having trusts¹ as part of an estate plan. Below are some of the most common advantages that trusts can offer:

1. Trusts can reduce probate expenses and  obligations – The assets transferred to and held by trusts (for future distribution) will not have to pass through probate² in Colorado after the death of the grantor.
   
   This can mean that trusts may facilitate the probate process in some cases, as there will be less assets held by the estate that need to pass through probate. In other situations (like when all assets of an estate have been transferred into trusts), trusts may be the key to bypassing the probate process altogether.
   
   Limiting – or eliminating – the need for probate can be an enormous benefit, both in terms of cost savings and protecting loved ones in the future, as the expenses of probate can be reduced (or avoided) while beneficiaries may have access to much-needed assets far sooner (because they will not have to wait for those assets to pass through probate).
   
   
2. Trusts maintain privacy – When probate for an estate is opened, the will – and the ensuing court proceedings – will generally become part of public record. This can mean that anyone can access these records, find out the value of the estate, learn who the beneficiaries are, and become familiar with other details (like how much was left to certain parties, the creditors an estate has, etc.).
   
   With trusts, however, the details of the trust’s holdings, distributions and beneficiaries will remain private (as these will not be part of court proceedings). This can be hugely beneficial for some grantors and families, especially those who may be in the public eye.
   
   
3. Trusts can protect assets from creditors – As part of the probate process, creditors for an estate can seek repayment of outstanding debts. If an estate cannot satisfy those valid debt claims (because, for instance, the debts exceed the value/assets of the estate), creditors may be able to go after the assets of the estate to try to recoup some of the monies owed. And that can mean that assets intended for certain beneficiaries end up the hands of creditors, rather than loved ones.
   
   If, however, assets are held by a trust, those assets will be off limits to creditors, protecting them for the intended beneficiaries. This can be especially beneficial for grantors who are buried in debt but who want to ensure that their loved ones have access to certain assets after they pass.

Common Types of  Trusts 

When you are ready to enjoy some of the benefits and protections trusts can offer, it will be time to decide exactly what type(s) of trust(s) to put in place. And that will depend on a number of factors, including (but not necessarily exclusive to):

• Your circumstances and estate
• Your intended beneficiaries
• The assets you plan to use to fund the trust
• Your estate planning goals.

Some of the more common types of trusts³ to consider incorporating in your estate plan include (but are by no means limited to):

• Charitable  trusts – As the name implies, these types of trusts are used for giving assets to charities or other organizations (e.g., schools, museums, religious entities, etc.).
  
  
• Life  insurance trusts – Holding the proceeds of life insurance policies, these types of trusts can protect the cash value of life insurance payouts, preventing creditors from having access to them while minimizing (if not eliminating) the estate taxes associated with these proceeds.
  
  
• Living  trusts – Also referred to as revocable trusts or inter vivos trusts, living trusts take effect during a grantor’s lifetime, and they allow the grantor to alter the terms of trust at any point (as long as the grantor is of sound mind). This can allow grantors to adjust the provisions of trusts as their life circumstances evolve. Upon a grantors’ death, living or revocable trusts will automatically become irrevocable trusts.
  
  
• Irrevocable  trusts – These trusts do not allow for changes once the trust takes effect. This means that, once an irrevocable trust has been created, grantors cannot change their terms or take back any of the assets used to fund the trust. Although irrevocable trusts can be more limiting once in effect, they can offer some tax savings.
  
  
• Special  needs trusts – Set up to provide financial support to those with special needs, these types of trusts can be crucial to protecting disabled or impaired loved ones without compromising their rights to government benefits in the future.
  
  
• Spendthrift  trusts – Preventing beneficiaries from selling the assets of trusts, spendthrift trusts can be appropriate when beneficiaries may have serious debt problems and/or gambling issues.

Consulting a lawyer as you are considering your different options for trusts can be crucial to:

• Making a selection that will meet your needs and protect your interests
• Properly setting up the framework for your trust.

Developing a Trust:  How to Fund Trusts 

Once you have the framework of your trust in place, the next step will be to fund the trust. In other words, you will have to transfer some asset(s) into the trust’s ownership (otherwise the trust will be meaningless, as there will be nothing for the trust to hold, manage and/or distribute).

While various assets can be used to fund trusts, some of the most common include:

• Cash – Money from checking and/or savings accounts, retirement accounts, CD accounts or other investment accounts can all be transferred directly into a trust, either immediately upon creating it – or at any point in the future, such as upon the death of the grantor.
  
  
• Real  property – This can include homes and real estate, household furniture, art collections, jewelry, firearms, motor vehicles, and other personal effects. In many cases, trusts can be an effective way to pass precious family heirlooms down to beneficiaries.
  
  
• Insurance  proceeds – Having these assets be passed through a trust can protect the cash value of the policy, ensuring that beneficiaries are able to retain more of the proceeds than they would have received had the trust not be in existence.
  
  
• Business  interests – This can include stock in business, as well as partnership interests, royalties from business ventures, etc.
  
  
• Other  assets – These can include (but are by no means limited to) stocks, bonds, patents and even mineral rights.

Whichever type of asset(s) you use to fund your trust, be aware that the trust’s holdings will generally be subject taxes⁴ (particularly if the trust’s holdings generate income). Tax implications will also come into play when the trust makes distributions to beneficiaries. To understand the specific tax obligations associated with trusts, it’s strongly advised that grantors and/or trustees work closely with an attorney.

Trusts &  Estate Planning: More Important Information

• Selecting  a trustee – As part of the process of developing a trust, a grantor will have to select a trustee to oversee and administer the trust. While the grantor him- or herself can be the trustee for a living trust, for other types of trusts (particularly those that take effect after the grantor’s death), the trustee will have to be a different party.
  
  In general, the best options for trustees will be those who are organized, responsible, diligent and trustworthy. While trustees can be relatives or others, they can also be professionals, like lawyers.
  
  
• Administering  trusts – This can be an involved process, as trustees will not only have to understand and carry out the specific provisions of the trust, but they will also be obligated to fulfill some general trustee duties, only some of which include:
  • Maintaining accurate, up-to-date accounting records for the trust
  • Putting the interests of the trust above their own personal interests
  • Regularly reporting on the state of the trust (to the court and/or the trust’s beneficiaries).

Whether you are preparing to develop, alter or administer a trust, working with a seasoned estate planning lawyer will be essential to preserving and advancing your interests while minimizing any potential liabilities that could arise in the future.

Full Disclosure

The information in this article is not, nor is it intended to be, legal advice.

For additional information about estate planning and probate in Colorado, you are encouraged to contact the experienced attorneys at Gradisar, Trechter, Ripperger & Roth. Based in Pueblo, Colorado, Gradisar, Trechter, Ripperger & Roth is a general practice law firm, specializing in estate planning services and probate representation.

References:

1: Trust & Estate Planning Information from the American Bar Association (ABA) - http://www.americanbar.org/groups/real_property_trust_estate/resources/estate_planning.html

2: ABA’s Overview of the Probate Process -http://www.americanbar.org/groups/public_education/resources/law_issues_for_consumers/probate.html

3: ABA’s Overview of Types of Trusts - http://www.americanbar.org/content/dam/aba/migrated/publiced/practical/books/wills/chapter_4.authcheckdam.pdf

4: Basic Trust Tax  Requirements from the IRS - https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Abusive-Trust-Tax-Evasion-Schemes-Facts-Section-II