You may have heard about people setting up trusts to avoid probate, manage funds, or plan for estate taxes. Estate planning attorneys use trusts to accomplish a wide range of goals. But even many people who use trusts do not understand what they are. They view the trust as a type of account.
But a trust is much more than an account. A trust is an artificial legal entity created to hold property, and because it is an intangible construct, it can confuse many people. Here, we explore what trusts are and how they operate.
A Trust is Like a Virtual Bucket
It is often easiest for estate planning attorneys to describe a trust as a type of bucket. That bucket can be filled with any property or asset, but it starts out empty. Putting assets in the trust bucket keeps them together and can protect them, depending on the type of trust used.
A trust can hold essentially any type of property, such as:
- Real estate
- Cars and other vehicles
- Household goods
- Artwork and collectibles
- Cash in bank accounts or a box under the bed
- Intangible property, such as mineral rights
- Shares of stock or mutual funds
- Life insurance proceeds
For certain types of property, such as real estate, you transfer the property to your trust with a deed transfer similar to the one created when you bought the real estate. For other types of property, such as furniture, art, or household goods, you can change ownership through the words of the trust document.
A Trust Splits Up the Attributes of Property Ownership
Ordinarily, when you own property, you can control it and use it however you want for your own benefit or that of someone else. A revocable living trust is similar. Even after adding your assets to the trust, you control it and you can use it any way you like. However, other types of trusts may split the element of control away from the element of benefit.
After you transfer assets into an irrevocable trust, they are managed by a trustee. The trustee is the caretaker of the assets. However, the trustee does not get to use the property for their own benefit. Instead, the trustee takes care of the property for someone known as the beneficiary. A trust can have one beneficiary or many. The assets in the trust are ultimately for them, held in trust for their benefit.
Trusts are often set up for minors who aren’t old enough to manage their own money. A relative, attorney, or other professional might serve as the trustee, investing the assets to increase in value and disbursing money to the beneficiary as needed or under the trust terms. The trust may specify that assets can only be used for education, for instance, or it might provide for regular payments to meet daily needs.
Why We Use Trusts
We establish trusts to protect assets in some way. Sometimes, property is put into a trust to hold for someone not ready to manage it, either because of age or because they have yet to learn how to be responsible with money. Other times, we add assets to a trust so that an individual with special can continue to receive government benefits such as Medicaid after receiving an inheritance or money from a lawsuit.
Transferring property into a trust also removes it from the ownership of the person who created it. This may help reduce tax liability, avoid probate, protect assets from creditors, and establish eligibility for Medicaid long-term care benefits. However, different types of trusts are used to meet different goals, and an estate planning attorney can help you choose the best trust for your situation.
Trusts Designed to Avoid Probate
Trusts can also be revocable—changeable—and we often use these to help clients avoid the hassle and expense of probate in the future. Because the trust can be changed, the person who created it can take property out, and they enjoy the benefits of ownership. When they pass away or become incapacitated, the person they have designated as a successor can step in to manage the property and distribute it to beneficiaries without the need for probate or guardianship proceedings.
Other types of trusts are irrevocable, so once property is transferred to the trust bucket, the trust creator loses control over it. These types of trusts protect from creditors, taxation, and other potential losses.
Find Out How a Trust Could Benefit Your Family
At Jennifer Porter Law, PLLC, we create trusts as part of comprehensive planning to help our Virginia clients and their families prepare to meet their needs in the future. To discuss the advantages a trust could provide, contact Jennifer Porter Law, PLLC, at (571) 532-9070 today.