What Is A Trust?
A Trust is a legal entity that is created to hold title to property for one or more persons.
There are many different kinds of trusts:
You can create a trust that takes effect while you´re alive, known as Living Trust. This kind of Trust generally avoids the need for probate. You can make your Living Trust revocable, which means that you can change or terminate it any time during your life. Or, you can create an Irrevocable Trust, which can never be altered or have assets withdrawn, even in an emergency.
You can also create a trust through your Will, which takes effect after you die. This is known as a Testamentary Trust. This type of Trust requires a probate process.
How Does A Trust Work After Your Death?
At your death, the successor trustee manages the trust assets according to your specific instructions in the Trust. The successor trustee has the same kinds of duties that an executor would have in probating a Will. He or she pays all of your remaining debts, including any taxes, and then distributes the remaining assets to your beneficiaries. Distributing from your Trust does not require court supervision, and is therefore more simple and private than probate. Often the trustee can use certified copies of the Death Certificate and the Trust Agreement to begin managing assets right away, instead of waiting for a court order as required in probate.
If you own any assets that are not titled in the name of the Trust when you die, a probate may be necessary.
How Long Does A Trust Continue?
The Trust continues as long as there are assets to manage. This depends on the terms you choose and the circumstances of your beneficiaries. If you instruct your trustee to distribute all assets immediately after your death, then the Trust will terminate as soon as your debts are paid and the distributions are made. If you have minor children or disabled beneficiaries, or if you wish to restrict access to funds for a certain number of years, then the Trust will continue to operate for as long as you specify.
Will A Trust Avoid Probate?
A properly drafted and funded Trust will avoid probate as to assets titled in the Trust. However, probate will be necessary to transfer any assets that were not transferred to the Trust unless those non-trust assets are jointly held with another person or have payable on death beneficiary designations. If a probate is necessary your 'Pourover Will' will be submitted to the court, and then the probate assets will 'pour over' into your Trust and be distributed according to your trust instructions. If you do not have a Will, then the laws of intestate succession will apply to the non-trust assets.
How Much Does A Trust Cost?
Expenses associated with trusts fall in two stages:
The initial drafting stage is usually more complex than that of a standard Will. Your lawyer can draft a document for you with almost any kind of conditions to guide, dictate, or limit the use of trust funds. Once you decide on the terms of your Trust and the accompanying documents, a responsible attorney will also give you direction on the funding process as needed. An improperly funded Trust can render it completely ineffective.
The second stage involves administering the Trust after you pass away. This process is simpler than probate, and usually the savings will more than offset your initial investment in creating the Trust. For example, there will not be any court filing fees and there is no requirement to pay to publish any legal notices. However, your successor trustee will probably benefit from having an attorney review the trust terms and discuss the trustee´s responsibilities. The trustee may wish to have additional assistance throughout the administration process, depending on the size, complexity, and number of beneficiaries of the Trust.
Most trusts also pay a fee to the successor trustee. Tax preparer fees are also necessary, and will vary depending on the size, complexity, and number of beneficiaries of the Trust. Sometimes trusts also have appraisal fees and/or insurance premiums for real or personal property, as well as postage and/or shipping costs.
What About Taxes?
For the typical Living Trust, income taxation continues to work the same way, as if you still owned the assets outright. This is true during your lifetime, and also after you pass away, during the period of trust administration.
Generally, there are three types of taxes that a trust estate may have to pay:
- Taxes on income earned before the person died;
- Taxes on income earned after death and before assets are distributed; and
- Estate and Inheritance Taxes on the total value of assets owned by the person at death.