A trust is a relationship in which a person, called the grantor, makes gifts to beneficiaries through an intermediary third party, the trustee, charged with making those gifts as instructed by the grantor.
The defining characteristic of trusts is flexibility. There can be multiple beneficiaries, those beneficiaries can vary over time and the conditions placed on their gifts. A trust is a great way to plan for minor children or disabled beneficiaries to receive inheritances or to leave gifts to beneficiaries who may not be great at managing money. For families of wealth, trusts are the best way to minimize estate taxes.
If any of the following scenarios sound like your or your family, a trust might be for you:
- Your net worth is at least $150,000, including your home.
- You wish to leave assets to minor children.
- You wish to leave assets to someone who receives Social Security or Medicaid.
- You are heading into retirement with modest savings and no plan for disability.
- You wish to leave assets to a, perhaps, irresponsible beneficiary.
- You wish to leave assets to your beneficiaries over a long period of time.
- You wish to keep your estate private.
Some trusts are revocable, which means the Grantor can amend or cancel them at any time. Other trusts are irrevocable, which means the Grantor cannot revoke the trust or change the distribution terms. An irrevocable trust is useful for moving assets out of the name of the Grantor in order to protect those assets from creditors and make them “uncountable” for the purpose of qualifying for state benefits.
In a common estate planning scheme, a grantor makes a revocable, inter vivos trust and names him- or herself the trustee and beneficiary until the date of death. Then, a successor trustee takes over for the grantor and makes distributions to beneficiaries according to the grantor’s instructions.
We encourage everyone considering an estate plan to consider whether a trust is right for you. There are many different types of trusts, and the best person to help you decide which is best for you and your goals is a licensed attorney. Please see below for some additional information about trusts.
Advantages of a Trust in Estate Planning as a Tool:
- Flexibility: A trust can be whatever you want to be. You can place almost any condition you like on beneficiary distributions.
- Avoiding probate: Distributions made pursuant to a Will happen with the intense supervision of the Probate Court and generally require the assistance of an attorney. Using a trust can bypass that process, saving money in court costs and attorney fees.
- Protecting Beneficiaries: A Trust can protect beneficiaries who receive public benefits, like Social Security and Medicaid, and ensure they remain eligible for those benefits while also ensuring that they are cared for. A trust can also protect less responsible beneficiaries from blowing through a gift meant to last a lifetime.
- Privacy: Distributions to beneficiaries pursuant to a trust are completely private; distributions made pursuant to a Will through the probate process are a public record and open for anyone to inspect.
- Divide Gifts: a trust allows the grantor to divide gifts between multiple families or groups of beneficiaries. A common scheme is to leave trust income to a second spouse for his or her life, then the principle to children from a first marriage
- Maximize Tax Advantages: For individuals with $5 million or more and couples with $10 million or more, trusts are useful tool for minimizing estate tax liability and controlling when estate taxes are paid.
- Protect Your Legacy: Certain kinds of trusts can protect your wealth from catastrophe, like a judgment against you or your intended beneficiaries.
Trust Vocabulary in Estate Planning:
- Beneficiary: a person or entity to whom the grantor intends to make distributions of trust property sometime during the life of the trust. The beneficiary or beneficiaries may be different at different times.
- Fiduciary: describes a relationship in which one person, the fiduciary, is charged with acting solely in another’s, the principal’s, interest. Fiduciary duties are set by law, and breaching these duties can result in liability. Fiduciary duties include: care, loyalty, and avoiding conflict of interest. A trustee is a fiduciary both to the grantor and to the beneficiaries of a trust.
- Grantor: the person who creates a trust and places his or her property and money in it. This is also sometimes called a settlor, or donor.
- Inter vivos: An inter vivos trust is created during the life of the grantor.
- Probate: This is a tricky term. When used as an adjective, it describes the court that hears estate, guardianship, and adoption cases in Ohio. When used as a noun or verb, it refers to the process of administering an estate with or without a Will with the supervision of the court.
- Testamentary Trust: A testamentary trust is created by the grantor’s Will, and thus does not come into being until after the death of the grantor.
- Trust Instrument: the written document that creates the trust, instructs the Trustee on his or her duties and responsibilities, and sets out instructions for distributions to beneficiaries.
- Trustee: the person, or sometimes an entity, who manages the trust property as instructed by the Grantor in the trust instrument.