Question: What is a trust and how can I decide if that should be a part of my estate planning?Answer: A trust is a written agreement (or contract) between the Trustmaker and the Trustee under which the Trustee holds and manages property for the benefit of the Beneficiaries chosen by the Trustmaker. The most common type of trust in an estate planning context is a revocable living trust, sometimes also called “intervivos trusts,” and may be an effective estate planning tool.
The parties involved in a living trust include:
- The “Trustmaker,” the person who creates the trust agreement while living;
- The “Trustee,” the person who is responsible for carrying out the instructions set out in the trust agreement; and
- The “Beneficiary,” the person who is to benefit under the terms of the trust agreement.
For a living trust, the Trustmaker is often also the Trustee and the Beneficiary during their life. A living trust may be revoked or amended at any time while the Trustmaker is alive and able. After a Trustmaker dies, however, his or her trust becomes irrevocable, meaning it cannot be changed.
Living trusts are not just for wealthy people. A living trust is an effective estate management tool before and after a Trustmaker’s death, and allows for a safe way to manage and use trust property for the benefit of the Trustmaker and his or her chosen Beneficiaries. Living trusts provide additional benefits, particularly when the Trustmaker owns real estate in different states or becomes incapacitated.
Like a will, a living trust is a set of directions. Unlike a will, it provides direction to the Trustee about how assets are to be distributed and managed during the Trustmaker’s life and upon the Trustmaker’s mental incapacity. Like wills, living trusts include directions for how the remaining assets are to be distributed upon the Trustmaker’s death.
A properly drafted living trust often includes terms that protect the Trustmaker and their property if the Trustmaker becomes mentally incapacitated. The Trustmaker can name a successor trustee to manage the trust property upon their incapacity. The living trust instructions can provide the successor trustee with guidance on how property is to be managed, bills are to be paid, and the how the Trustmaker’s support and maintenance needs are to be met. This can prevent the Trustmaker’s loved ones from having to go to court and be appointed as a guardian or conservator for the Trustmaker.
Also like a will, a living trust includes instructions for the distribution of the deceased’s estate. However, a will must be probated. Probate is the legal process during which a judge validates the will, gives the personal representative the authority to act on behalf of the deceased’s estate, and supervises (either informally or formally) the process of distributing the deceased’s property and paying their valid debts. Probate cases are generally included in the public record. Unlike wills, a trust administration does not require court involvement and allows for a private distribution of the Trustmaker’s property.
However, having a living trust in place at the Trustmaker’s death does not mean that the Trustmaker’s survivors will be able to avoid a probate action. A trust may be created, but may never be funded or not funded completely. It is common for the Trustmaker to execute a “pour-over will” in conjunction with their living trust. This will direct all of the Trustmaker’s property that is not properly titled in the name of the trust to be distributed to the trust. If the trust is not properly funded, the property outside of the trust will need to be transferred into the trust through the use of the pour-over will, or a will that directs everything to the trust, through the probate process. After the pour-over will is probated and the property is transferred into the trust, the Trustee will then distribute the property per the instructions provided in the trust agreement.
Trust funding refers to the retitling or acquiring of assets in the name of the trust. The Trustmaker conveys all or some of his property to the trustee so that the Trustee becomes the owner of the property subject to the terms of the trust agreement. Once property is properly titled, the Trustee may manage and distribute the property as instructed in the trust agreement.
There is a common misconception that a living trust can provide creditor protection both before and after death. While a Trustmaker is alive, the Trustmaker’s creditors may have access to trust property. After the Trustmaker dies (at which point the living trust becomes an irrevocable trust), the trustee may pay the valid debts of the Trustmaker. Unlike in a probate action where creditors face a time deadline, there is no such deadline for creditors in a trust administration. In addition, a probate action allows a surviving spouse and dependents to protect some of the decedent’s property from creditors by electing to take a family allowance, which must be paid to the family before any creditors are paid. In a trust administration, however, it is not certain that family members will be given such priority over creditors.
Although costs will vary depending on where you live, the attorney you choose to hire and the complexity of your situation, having a simple will drafted can cost $250 and up. While a will may be less expensive to prepare, the costs of probate are unpredictable and generally range from $1,000 to $6,000, including attorney fees, court costs and other related expenses. The costs associated with preparing a living trust also vary, but generally run from $750 to $5,000. Regardless of whether you choose a will or a living trust, in order for either to be effective, there are fees associated with funding the trust and titling property to coordinate with your will.
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Legal Lines is a question and answer column provided as a public service by the Colorado Bar Association. Attorneys answer questions of interest to members of the public for their general information.