Trusts differ from wills in many ways. A primary distinction between trusts and wills is the fact that assets contained in a trust are not subject to the probate process. Conversely, assets bequeathed in a will are indeed subject to probate. What is the probate process, you ask? Probate is the legal system that accounts for and distributes an individual’s assets upon their passing. Many people aim to avoid probate because it is time consuming and expensive. If your goal is to transfer assets quickly and efficiently, you would be wise to craft an estate plan that avoids the probate process to the extent possible. There are a number of ways to transfer one’s assets upon death and avoid probate, which commonly include transferring assets via a life insurance policy, a joint bank account with a right of survivorship, or holding real property in joint tenancy with the right of survivorship. Merely gifting your assets away prior to death will help you evade probate as well.
Unlike wills, trusts need not be funded at their creation. To bequeath property via a will, all of the relevant property must be sufficiently described at the time the will is executed. Unlike wills, trusts can be funded at any point in time. In other words, a trust can be properly created but contain no assets at its inception. It can even be funded after the creator’s death. The value of the trust is determined by the assets transferred into it, and is subject to change over time. Additionally, unlike wills, trusts can be either revocable or irrevocable. Irrevocable trusts protect the trust principal more completely than a revocable trust can. Wills, on the other hand, are always revocable, assuming the testator retains the mental capacity required to execute a new will.
There are many different types of trusts, and one should seek competent legal counsel to fully understand if a trust is right for them, and if so, what sort of trust would best suit their needs. In this discussion, I will touch on three types of trusts: Living Trusts, Testamentary Trusts, and Special Needs Trusts.
A Living Trust is one of the most common types of trusts. A Living Trust is created by an individual, referred to as the grantor, during the grantor’s lifetime. The purpose of a Living Trust is to enable the grantor, while alive, to place assets “in trust” for specified beneficiaries, which are to be managed by a trustee. The trustee, appointed by the grantor, has the legal right to manage and control the trust assets. As such, the trustee is in charge of distributing the trust assets according to the provisions of the trust. It should be noted that the grantor can appoint herself to be trustee if she wants to retain the power to control of the trust assets during her lifetime. The trustee is legally bound to carry out the instructions detailed in the trust, and has a fiduciary duty to the beneficiaries of the trust. One of the primary purposes of placing assets in a Living Trust is to ensure that the assets are properly managed in the event that the grantor becomes incapacitated or loses the ability to manage her property effectively. Much like a will, upon the grantor’s death, the trust assets will be distributed according to the provisions outlined in the trust.
A Testamentary Trust is a trust that is created via the grantor’s Last Will and Testament. Accordingly, a Testamentary Trust does not become effective until the grantor’s death. Testamentary Trusts are commonly used to control how and when beneficiaries will be able to access the trust assets. Individuals who are leaving sums of money to minor children, for example, will commonly employ a Testamentary Trust to dictate how much is given to the minor child, when they will receive it, and even what the funds can be used for.
A special needs trust is a complex instrument created for the sole purpose of preserving the governmental benefits that a disabled person is receiving. Put alternatively, a special needs trust allows an individual with special needs to receive income or assets without affecting any current or future benefits that person receives from the government. A special needs trust differs from the trusts described above in that the trust principal cannot be given directly to the disabled beneficiary. If this occurs, the beneficiary’s benefits may be put at risk. Rather, the trust assets can only be used to contribute towards the beneficiary’s out of pocket expenses relating to their disability, health care costs, education costs, and the like. If the trust is not created properly, the individual for whom the trust is intended to protect can lose her benefits. Importantly, people in the beneficiary’s life should be made aware of the trust and its purpose, because gifts or inheritances made to the beneficiary must be made in accordance with the terms of the trust. Otherwise, the individual’s benefits may be put at risk.
Trusts are easier to create than wills because they do not have the complex statutory execution requirements that wills do. However, on the whole, trusts are usually more complex than wills, and often not as easy to modify or revoke. It is always advisable to consult with an attorney who can properly advise you of the various types of trusts and which one would best suit your particular needs. Call us at (856) 227-7888 or email [email protected] to schedule a free 30 minute estate planning consultation. We have locations in Camden, Burlington, and Gloucester counties, and are happy to discuss your legal options.