Trusts

What Is a trust?

A trust is a legal entity to which your assets (bank accounts, securities, house, etc.) can be transferred for management by a trustee. Trusts can be created while you are living to manage your assets while you are alive or to help your heirs manage their inheritance after your death. There are a number of types of trusts, each with its own set of benefits. As such, trusts can be complicated, so it is important that you contact a lawyer to make sure that you understand all of the issues about trusts.

One well-known type of trust is a “living trust.” It's called that because you create it while you are living, as opposed to creating the trust in your will. The legal name is "revocable inter vivos trust" or, as we call it at Danyi Law, a "RIVIT".

There is a lot of aggressive marketing and false information out there, especially on the internet. Be aware that although a living trust could be right for you, a trust is a serious legal document. You should review any trust with a lawyer experienced in estate planning before making a commitment. Trusts can ensure flexibility in your asset management and may have tax benefits, but you should be sure that you really need one and that it fits your needs.

Here's a very simple analogy: think of a briefcase. You put a stack of $100 bills and the deed to your house into it. You conduct your life normally, using the assets in the briefcase. At some point, you get sick and can't handle your own affairs, so you hand the briefcase to your spouse or one of your kids whom you trust with money. They use the assets in the briefcase for your care. Upon your death, what's left in the briefcase goes to whomever you said it goes to.

Myth: “If I have a trust, then I do not need a will.”

False — even if a trust is right for you, you need a will. If some of your property is left out of the trust, or if any portion of the trust is invalid, a will can ensure your assets are transferred consistent with your wishes. It is a rare thing when somebody dies with 100% of their assets in their trust.

“If I have a trust, my estate will not pay attorney’s fees.”

False — because transferring assets from a trust to the beneficiaries will require accumulating assets and distributing them (and since taxes may be due), it is usually necessary to hire a lawyer to help administer the trust after death. In addition, there are legal fees associated with preparing the trust document, transferring assets to the trust, and avoiding tax problems.

“If I have a living trust, the assets will not be considered mine if I need to go to a nursing home.”

False — because living trusts usually are revocable (meaning you can change them during your lifetime), they will be considered your assets if you apply for nursing home benefits.

“If I have a trust my estate will not pay inheritance or estate taxes since my estate won’t need to ‘go through probate’.”

False — generally speaking, any transfer of assets as a result of death will result in inheritance and possibly estate taxes being due. Thus, in most cases, property passing by a living trust will be subject to tax. Certain trusts, referred to as irrevocable trusts, may have tax advantages that other trusts can’t provide and may not result in inheritance taxes, although there are federal gift tax considerations.

"I want to put my IRA in a trust".

Bad idea. An Individual Retirement Account (IRA) is not a type of asset; rather, it is a mechanism for deferring income tax on retirement savings. IRAs that end up in trusts can trigger a multitude of unwanted tax consequences.

Other Types of Trusts

Revocable living trusts aren't the only kinds of trusts. There are many different types of trusts that can be created for the private management of your assets and affairs.

There are irrevocable trusts, where you transfer assets to the trust permanently, usually to get the asset that is going to go up in value out of your estate.

You can create a special needs trust for a family member who has a mental or physical disability and is receiving means-tested government or insurance benefits.

Trusts can even be created to take care of a dog or other pet after your death.