All About Trusts
Hi! I'm Rachel Harris from The Shore Lawyer, and today I'd like to clarify some common questions about trusts. Many clients come to me unfamiliar with trusts, often at the suggestion of their children. They find them confusing, so my goal is to simplify the concept. Keep in mind, this blog should not be considered as legal advice but rather an overview of what trusts are and why they might be beneficial for you.
Trust Basics
Revocable vs. Irrevocable Trusts
Trusts are an increasingly popular tool in estate planning. At their core, trusts can be categorized into two main types: revocable and irrevocable. The distinction is straightforward: revocable trusts can be altered or revoked by the creator, akin to transferring money between different bank accounts. On the other hand, irrevocable trusts, once established, cannot be changed.
Living vs. Testamentary Trusts
We also differentiate between living and testamentary trusts. A living trust is established during your lifetime, while a testamentary trust is created upon your death, primarily used to manage assets for a minor.
The Purpose of a Trust
A primary benefit of a revocable living trust is probate avoidance. Probate is the legal process that occurs after someone passes away, involving the allocation of their assets and debt settlement. Trusts help bypass this process, maintaining the privacy of the deceased's estate. They are especially beneficial when handling properties in multiple states or managing ownership interests in a business.
Roles Within a Trust
A trust involves three roles: the grantor (who establishes the trust), the trustee (who manages the trust), and the beneficiary (who benefits from the trust). While you are alive, you can fulfill all three roles. If you become incapacitated, a successor trustee takes over, ensuring your affairs are managed without interruption.
Power of Attorney vs. Trusts
A common question is how trusts differ from a power of attorney. While both serve to manage your affairs upon incapacitation, a power of attorney pertains to assets outside of a trust. Therefore, having both documents ensures comprehensive management of your assets.
Why Privacy Matters
Trusts offer a degree of privacy that probate does not, as probate proceedings are public records. With trusts, the details of your estate remain private — an appealing feature for many.
Challenges with Trusts
There are some instances where trusts might not be advantageous. For instance, traditional IRAs benefit from a 10-year stretch rule, allowing beneficiaries to withdraw funds tax-free over a decade. A trust does not automatically apply this rule, potentially shortening the timeframe for tax-free withdrawals. It's crucial to weigh these aspects when considering if a trust is right for you.
The Importance of Funding Your Trust
Creating the trust document doesn’t automatically transfer your assets into the trust — you must actively transfer ownership. Without funding your trust, you miss out on many benefits, such as avoiding probate and maintaining privacy.
Conclusion
This post covers revocable trusts. If you're contemplating setting up a trust or need guidance on estate planning, The Shore Lawyer is here to help. Feel free to reach out to us for a peace of mind planning session, or even if you just need assistance with a will. Visit www.theshorelawyer.com to schedule an appointment. We’re here to help with all your planning needs. Have a great day!
