Trusts in Estate Planning and Litigation
Trusts are an ancient legal mechanism that protect your assets, and they’ve only become more popular with time. Trusts can be used instead of wills to pass on your assets to the next generation, or as a way to protect money for a family member with support needs or financial trouble. A trust can provide a way of investing for someone who needs help with their finances, or it can be used to supplement what is provided with a will. Trusts are also used instead of corporate entities to protect business assets by some individuals.
With so many options for trusts, the information online can be overwhelming. Should you set up a trust for your loved ones? And what happens when a trustee does not follow the rules of the trust?
What is a trust?
To begin with, we should understand what a trust actually is. Think of a trust like a basket in which you can place anything you own—your house, your cars, your 401k. One person, perhaps including yourself or someone you appoint, holds onto the basket for the duration of the trust. This person has legal ownership over the property in the trust. They don’t own it outright, not themselves, like you did before you put it into the trust. Instead they hold the basket only to protect and invest it for the people you want to distribute to.
Sometimes people put their property in a trust during their lifetime, giving themselves lifetime rights to use and benefit from the property, while setting it up to move to their heirs after they die. You would then choose who you want to give the benefit of the property to over time. These people are called “beneficiaries.” A trust requires the existence of three people:
- A “settlor,” who sets up the trust,
- a “trustee,” who administers the trust for the benefit of the beneficiaries,
- and at least one “beneficiary,” who benefits from the trust.
In some cases, the settlor is also the trustee or beneficiary, and technically, the same person could even hold all three roles.
What are the benefits of this approach?
First, it removes the property from the probate process. Any property that passes through your trust after you die does not go through the judicial process for administering a will. This can protect the trust from litigation and court formalities that may be expensive, divisive between your heirs, and time consuming.
It also changes the way taxes are paid on the estate after death.
Perhaps most importantly, it gives you flexibility and control. You can arrange your trust however you want it. You could, for example, provide an inheritance to a minor child specifically dedicated to fund their college. You can provide for your children’s children in ways that change as they grow. You can set priorities for how you want money to be distributed among your heirs. For example, you might say that they will always get money if they encounter a medical bill they can’t pay. A very important aspect that you can insert into a trust is a “spendthrift clause.” This means, if your beneficiary defaults on debt and the creditor comes to collect, they can never reach the money that would come out of the trust.
These are just some of the reasons why you might choose a trust. Setting up a trust is not necessarily an easy matter. The experienced attorneys at Cornerstone Law Firm have created many trusts and will help you figure out how you want yours set up. Contact us today to get started.
