There is a lot of talk around the issue of Trusts.  “Do I need a Trust?”  “Will a Trust preserve my assets?”  “Can I sell a home that is held in Trust?”  If your instincts tell you that you should seek more information about Trusts – keep reading.

Let us try to get to the bottom of all the chatter.  First of all, there are many different types of Trusts.  Each Trust should be drafted for a specific purpose.  Be wary of professionals that want to establish a Trust on your behalf if they have not fully explored your goals and then devised a plan that tailor fits your goals.  A Trust is not for everyone, and not everyone needs a Trust in his portfolio.

Even though many different Trusts exist, they can be generally categorized into two basic types:  Revocable and Irrevocable.  Beyond that, Trusts can be “Living Trusts”, ones created while you are alive, or “Testamentary Trusts”, ones that come to being after your death.  Let us talk first about Living Revocable Trusts.

Living Revocable Trusts

Living Revocable Trusts get their name from the fact they can be revoked or amended by the Creator of the Trust at any time.  The Trustee, the person who has access to the Trust assets, is usually the same person  who created the Trust.  This allows the Creator/Trustee to have full control over the Trust assets.  Therefore, if the Trust holds a home and $100,000 in cash, at any time the Creator/Trustee can take out any portion or the whole amount of the $100,000 in cash.  That Creator/Trustee also has the freedom to sell the home and take out the proceeds from the sale.  Many people are attracted to the freedom that Living Revocable Trusts allow them to have over the Trust assets.  But do you need this type of Trust?

Why Create a Living Revocable Trust?

There are many reasons why a person would want to create a Living Revocable Trust.  One such reason may  include the goal of avoiding the public nature of probate.  If you distribute your estate at the time of your death by way of a Last Will & Testament, that Will gets filed with the Surrogate’s Court, becomes a public document, and goes through probate.     Probate is the process by which the Court verifies that a Last Will and Testament presented to it is the most recent and valid Last Will and Testament of a decedent.  A Trust, on the other hand, never becomes a public document because it does not need to be filed with the Surrogate’s Court nor does it go through probate, so  its contents are kept private.  Therefore, if you know you will have provisions regarding the distribution of your estate that you want to keep private from other people, a Living Revocable Trust would be a sensible tool for you.

Another reason to create a Living Revocable Trust may include the goal of avoiding the fees associated with probate.  Probate can be a confusing and time consuming process if contested, so most people enlist the aid of an attorney to help them navigate through the process.  Attorney fees can be costly, so avoiding the probate process may be important to you.  Any assets held in Trust will escape the probate process.  You should be aware, however, that if you design a Trust that will remain intact for a substantial time after your death, like a Trust meant to sprinkle assets over time to your child or children, the Trustee would be entitled to a fee for his service in managing the Trust assets.  Since a Trustee’s duties can be difficult if the Creator’s estate is complicated, the Trustee often retains an attorney to provide him guidance.   So, in some cases the original goal of avoiding attorney’s fee may not pan out in the end.

Another reason a person may want a Living Revocable Trust would be to avoid a contest, particularly if he is disinheriting someone like a child.  Since the Trust does not become a public document like a Will that goes through the probate process does, it can be difficult to contest.

Why Not a Living Revocable Trust?

There are other valid reasons to establish a Living Revocable Trust, but there is one reason for which you should not establish a Living Revocable Trust – to preserve assets. You do not need to be an attorney to understand that if the Creator/Trustee has freedom to take assets out of the Trust, that Creator/Trustee can be compelled by valid creditors to take those assets out of the Trust.  Is all hope lost if you wish to preserve assets from creditors, like nursing homes, credit card companies, and even Medicaid?  No….enter the realm of the Irrevocable Trust.

The concept behind an Irrevocable Trust is to legally separate you (the Creator of the Trust) from legal ownership of the Trust assets.  If you do not legally own particular assets, then creditors may not be able to compel you to take those assets out of an Irrevocable Trust. A well drafted Irrevocable Trust, however, can give the Creator flexibility to oversee what happens to the Trust assets.

Look for our next newsletter that will fully explain Irrevocable Trusts and detail some of their pros and cons.

Craig & Christine