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Trusts in Estate Planning

As you consider your estate plan, it is almost a certainty that you will think about whether a trust is right for you given their high profile as a frequent topic of talk shows and articles. They are also, however, one of the most frequently misunderstood estate planning tools. It is often thought that a trust automatically avoids probate, or that estate taxes are automatically eliminated with a trust. There is no substitute for consultation with a qualified estate planning attorney, but this article will hopefully foster a better understanding of trusts and enhance your experience in developing your estate plan.

There are a variety of trusts available depending upon your specific needs and goals. For example, trusts can be created under your will to provide for asset management for your children after your death if they are under a certain age. These are referred to as testamentary trusts or contingent testamentary trusts. If your children are under the designated age, then the trusts will be created. If your children are beyond the designated age, however, then the trusts will not be created. Thus, the trust’s creation is “contingent” on the circumstances that exist when you pass away. Trusts created under a will can also be designed to provide for estate tax planning when necessary for larger estates.

You can also create a trust during your lifetime. These are commonly referred to as inter vivos or living trusts. These trusts are commonly revocable and can be changed at any time you desire. These can offer the ability to provide for asset management during your lifetime if you become disabled, to provide for privacy concerning the terms of your estate plan, to avoid probate upon your death, to provide for estate tax planning in the case of larger estates, and to provide for continued asset management for your ultimate beneficiaries after your death if so desired. Although less common, you can also make the trust irrevocable upon its creation. As an example, this may be done for estate tax planning when dealing with life insurance policies.

When considering a revocable living trust which is one of the most popular trusts, the beginning point is to understand that the trust is simply an agreement between you and the trustee for the benefit of designated beneficiaries. It is often helpful to think of the trust agreement as providing instructions, or a "road map," for the trustee concerning the administration of all property contained in the trust. Since a living trust is created while you are living, those instructions include what should be done with the trust assets during your lifetime. It also sets forth the terms of your estate plan for disposition of the trust assets at death. In short, whatever is in the trust “basket” will be controlled by those instructions both during lifetime and upon your passing. At the same time, an asset which is not in the trust will not be covered by your instructions.

Funding of the revocable living trust is therefore critical for the trust to function properly. If avoidance of probate is desired, this funding should also be done during lifetime. Simply having a living trust does not automatically avoid probate. As a general rule, you must title your assets into the name of the trust during lifetime to avoid probate of those assets at your death.

As for what terms or specific instructions should be contained in your trust agreement, these should be developed based on your individual circumstances and goals. You are starting with a blank piece of paper and quality drafting of those provisions is essential. It is much the same process as in drafting a will, and the job of your estate planning attorney is to assist you in clarifying your goals and drafting language that will insure your wishes are carried out.

Although not necessarily right for everyone, trusts are an excellent estate planning tool and you should consult with an estate planning attorney to see if one is right for you.


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