Many people who have heard of trusts think of them as something that only the uber wealthy benefit from. It’s a common misconception a trust provides many benefits for people of all income and asset levels. So let’s break it down and talk about what a trust is and what it can offer.
What is a trust?
A trust is an entity formed by drafting an agreement between two people, the Grantor and the Trustee, to hold and manage assets for the benefit of one or more Beneficiaries. Within the trust agreement, the Grantor has the ability to set forth parameters for what assets are held by the Trustee within the trust, what actions the Trustee is able to take and when, as well as who the Beneficiaries are and under what circumstances they can gain access or have assets distributed for the benefit of the beneficiary.
Why do people create trusts?
There are a large number of reasons to create and fund a trust. The simplest being to avoid the probate process, transfer assets quickly and efficiently, and reduce administrative costs after one’s death. The more advanced reasons include tax planning, extensive family planning including planning for minor children, liability protections, privacy, and avoidance of family conflicts.
Avoiding probate is a huge benefit to everyone but can be especially impactful for those families who do not have the resources to spend time and money on administration of a probate estate or even to cover funeral costs. The probate process is notorious for moving at a glacial pace and having fees, both court fees and attorneys fees. Depending on the size of the probate estate, the court fees alone could be higher than the cost of setting up and maintaining a simple trust, then add in the attorneys fees and administrative costs of a court proceeding and the benefits are even more clear. Further, the time it takes to navigate and complete the probate process, even when uncontested, can take months, which is time that assets are sitting frozen, untouchable by anyone, causing further loss to the estate.
If your family or planning goals include the possibility of minor or young adult children inheriting large sums of money, a trust can ensure that the money is managed and utilized for highest benefit of the children. Within a trust, you have the ability to name exactly who will manage the money, they are able to do so without court oversight and can continue holding the assets long after the child turns eighteen. In contrast, children in New York who are inheriting outside of a trust must have a special guardian of the property appointed for them if they are receiving $10,000. This is true regardless of whether they have a living parent. This guardian of the property must file an accounting with the court each year showing how they managed and spent the money, they must file an application with the court prior to spending the money and they must turn over the net value of the funds on the child’s eighteenth birthday. Most parents and relatives planning for a possibility of minors inheriting want to provide discretion to a loved one without court oversight and to continue protecting those assets well beyond the child’s eighteenth birthday. A trust is how they accomplish that.
Additionally, trusts can assist in reducing or eliminating family conflict. By outlining exactly who is in charge of managing and distributing the assets, as well as what each beneficiary is entitled to, the family members can have feelings about your choices, but they have less legal standing to fight for changes or alternate distribution when utilizing a trust. Further, since the trust is not filed in court and therefore not made public, a disinherited family member could be prevented from even knowing there were assets to distribute.
On a more advanced level, trusts can assist with tax planning, asset protection including qualifications for Medicaid and liability protections. Those benefits are best discussed with an attorney who can tailor the available benefits to your unique circumstances.