A trust is a very common estate planning tool, and with good reason. Trusts can help you avoid probate and certain trusts can provide asset protection. Trusts can be complicated legal instruments, though, depending on the size and nature of the trust’s estate. Regardless, an estate planning attorney can help you figure out the details. Here is what you need to know about creating a trust.
A trust is basically a fiduciary agreement between a trustee and the person creating the trust, known as the grantor. The term fiduciary simply means an agreement based on confidence and trust. The trust agreement provides the trustee the authority to obtain and manage all of your trust assets. The trustee is expected to manage those assets for the benefit of your named beneficiaries. The trust agreement will also include specific instructions about the management and distribution of your assets.
Deciding to include a trust in your estate plan is just the first step. The essential steps that are required in creating a trust. The basic steps to create any trust are as follows:
- Selecting the assets you want to include in the trust
- Choosing your trustee
- Identifying your beneficiaries
- Draft your trust agreement
- Fund your trust
A trust needs to be funded so that the property you want to be controlled by the trust will actually be included in the trust. In other words, you need to do more than simply sign the trust agreement. After the trust is properly funded, the trustee can then manage all of the property in the event you become mentally incapacitated or after your death. The methods you need to use to fund your trust will likely depend on the type of assets. Not every asset can be funded into the trust the same manner.
There are basically three methods for properly funding a trust. The proper way to fund certain assets depends on the type of asset. These methods include making a change of title or ownership, making an assignment of ownership rights, and changing the named beneficiary. Each of these methods is easy to achieve, however, you must follow the required procedures to ensure that your transfer is done properly.
Understanding Revocable Trusts
When you are deciding whether creating a trust is right for your plan, you should know there are different types of trusts with different purposes. Different trusts also have certain advantages and disadvantages. But, they all fall into one of two categories: either revocable or irrevocable. It is good to understand the differences between these irrevocable and revocable trusts.
When a trust is “revocable” the person creating the trust, the grantor, maintains the ability to modify the terms of the trust. The grantor can also revoke the trust completely at any time. For this reason, revocable trusts are very flexible, especially since circumstances can change requiring modifications.
Irrevocable trusts are different because they cannot be modified after they have been created. Nevertheless, being irrevocable can be a great benefit. Essentially, your assets are no longer considered a part of your estate so they are no longer subject to probate. Even though you are required to relinquish control of your assets with an irrevocable trust, you will enjoy valuable tax benefits.
There are two methods for modifying a revocable trust: amendment or restatement. Either way, the result is essentially the same. In certain circumstances, a trust amendment might be sufficient. For instance, marriage, children, or a substantial increase in your trust property are all reasons to consider amending your trust.
Furthermore, when the identity of your beneficiaries changes an amendment would be proper. Usually, this is an issue when a beneficiary dies or you change your mind about giving someone an inheritance.
Any property that is not properly funded into your trust will be required to go through probate. In other words, before you heirs can inherit those particular assets, the court must oversee the probate of your estate, which can be expensive and time-consuming. What that means is, if you overlook the need to fund all of your property, your trust may not be as effective as you expect.
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