Guide to Trusts

While setting up a trust might seem like something only the wealthy do, trusts can benefit anyone with assets. That’s because a trust is just a legal arrangement to ensure your assets are passed along to your preferred beneficiary. When it comes to estate planning, creating a trust may provide additional benefits during your lifetime and for your heirs.

 

Key Takeaways

• Revocable trusts protect your assets and let you access them while alive.
• You still need a will, even if you’re setting up a trust; trusts don’t cover personal property.
• Irrevocable trusts can help you better qualify for programs like Medicaid.

A trust is its own independent entity, like a corporation. It gets its own EIN, and its primary purpose is to hold assets for the benefit of another entity — a company, an animal, another trust. In this case, the entity is you. Because a trust is its own entity, it does not become part of your decedent estate when you die. Its assets are therefore protected from probate.

Probate is a legal process that involves reviewing the deceased’s will before distributing assets to loved ones as the will outlines. The probate process could take between 9 to 18 months, because it’s subject to the court’s schedule. That means, without a trust, your loved ones could be waiting over a year to access the property, money, or other assets you left behind.  

Anything left in a trust, however, does not have to be reviewed in probate and instead is handed over to a  “successor trustee” —  someone the grantor (person who created the trust) appointed to manage the trust after their death.

Wills may be easier for you to set up, but they cost your beneficiaries months or years of their own time after your death. Setting up a trust may be more complex, but can ease the burden on your grieving loved ones.

Knowing how to set up a trust starts with knowing what kind of trust is best for your estate. Two common types of trust are revocable trusts and irrevocable trusts.

A revocable trust lets one of your living trustees —  specifically the successor trustee —  decide which beneficiaries get what, and when they get it. Beyond avoiding probate lags, revocable trusts give elderly grantors a level of autonomy over their assets. For example, if you want to leave your nephew a sum but worry his looming divorce could complicate a monetary gift, a trust is a safer place to leave him that money than giving it to him outright upon your death.

Any of the below assets can be placed in a revocable trust: 

• Life insurance policy
• Checking account
• Property

Some of the benefits of a revocable trust include: 

• Easy to revise and update
• Helps your assets avoid lengthy probate proceedings
• Offers more control over your assets even after death
• May protect your heirs from their own liabilities (spending habits, creditors, etc.)

A revocable trust “allows you to have more control over your assets and money, even when you’re gone,” says Ashley Biteler, a trusts and estates attorney in Chesapeake, Virginia. “You can make sure your assets go exactly where you want them to go.”

You don’t lose access to your assets once you become the grantor of a revocable living trust. As the grantor, you are the primary trustee while you’re alive. Standard trust provisions call for the removal of a trustee at the time of death, or when your doctor deems you mentally incapacitated. Typically, the named secondary trustee gains control of the trust by operation of the rules of trust in either of these circumstances. So make sure your secondary trustee is trustworthy.

Irrevocable trusts get their name because they aren’t meant to be revoked or changed, even while you’re still alive. Which means setting up a trust like this not for any asset you plan to use while living, like bank accounts.

In exchange for that lack of flexibility, an irrevocable trust will protect the assets within the trust from your personal liabilities (like creditors) and the liabilities of your decedent estate once you pass. For example, sometimes grantors use an irrevocable trust to protect estates worth more than $13,610,000 from inheritance tax. Others may use an irrevocable trust to become eligible for public benefits like Medicaid.

There is also the potential for improved Medicaid or Social Security eligibility. Once the assets are in an irrevocable trust, they are no longer considered part of your estate, and therefore may not impact your chance to qualify for need-based government aid programs.

Irrevocable trusts, while restrictive offer benefits like:

• Protecting your estate from creditors
• Helping your assets avoid lengthy probate proceedings
• Protecting your assets from estate taxes
• Improving eligibility for government assistance programs like Medicaid

Irrevocable and revocable trusts aren’t the only kinds of trusts out there. You might also be interested in:

Asset Protection Trusts

These trusts are often created to do exactly what it sounds like they do: protect assets from creditors. Asset protection trusts can help you meet Medicaid’s asset limit if you have too many assets. Note that you have to wait five years after settling this trust to get Medicaid benefits, unless you have a disability (see below). 

Special Needs Trusts

A special needs trust is like an asset protection trust, but for yourself or an incapacitated loved one. If you or your loved one is disabled or incapacitated, you might want to lean on government programs like Medicaid or Supplemental Security Income (SSI). Owning too many assets may disqualify you or your loved one from these assistance programs, but if those assets are in a trust, you may get approved for government coverage.  You need not be incapacitated to create a special needs trust, but you do need to have a disability.

The burden of how to set up a trust doesn’t fall on you alone. A financial planner and attorney can and should assist you, the grantor, in transferring assets into your trust. 

Trusts have to have assets in them, or they can’t serve their purpose (avoiding probate, helping you qualify for Medicaid, etc.). The key to filling a trust is retitling. Funding your trust means ensuring your real estate holdings and various accounts belong to the trust. “It doesn’t do any good to have a beautiful trust with nothing in it,” Biteler says.

If your assets belong to you and not your trust, the assets may still go to probate after your death. Reminder: Anything you put in an irrevocable trust, you cannot touch or easily use again. Think carefully before funding your irrevocable trust.

A quick internet search will tell you who your local trust and estate attorneys are, and you may decide to meet with more than one of them. Setting up a trust online is an option, but will take more effort than seeking out a professional. And the likelihood of misinterpreting the nuances of trust set-up increases.

The cost of setting up a trust depends on the complexity of your assets. The more assets you have, the more intricate —  and therefore expensive — setting up your trust will be. Your end cost of setting up a trust likely won’t be a quote you can get after meeting with your attorney. But what you can get is a better idea of the path forward. Many lawyers offer a complementary introduction session in which you may cover the cost structure for setting up a trust. 

Irrevocable trusts are not meant to be updated or changed. But you can update your revocable trust) as frequently as you want. “It doesn’t hurt to review them every time you do your tax returns,” says Philip Feldman, head of the trusts and estates practice at Coblentz Patch Duffy & Bass in San Francisco. 

How to set up a trust is the first part, but updating a trust is just as crucial. When it comes to updating a trust, somewhere between once a year and every five years is the sweet spot. You may decide to update your trust because state or local laws changed, beneficiaries may have been born or died, or perhaps you changed your mind about a secondary or successor trustee.

Your attorney will be able to walk you through the steps of updating a trust, which may involve signing a trust restatement or revocation. Jotting changes in the margins of your trust, while legal, is not necessarily effective, and is an inadvisable way to update your trust.