Do I need a Trust?
If you have asked yourself whether you need a trust or not, you are not alone. There are many misconceptions as to when and why to create a trust. Then there is also the question of what kind of trust do I need? Revocable or irrevocable? This article will attempt to clear up some of these questions and dispel common misunderstandings about trusts.
What is a living trust and when should I use it?
A living trust is a trust that exists during your life, unlike a testamentary trust which is not created until your death. It shifts control to the person(s) you have designated, the trustee(s), in the easiest way possible upon your disability or death. If properly funded it also avoids probate. We will discuss testamentary trust and proper funding later.
There are two types of living trusts revocable and irrevocable. They accomplish different goals.
First, there is the revocable living trust, which is the most commonly used trust. There are two main reasons people put one together. First, these are used mainly to avoid probate. And second, they also allow you to shift control in the easiest way possible upon disability or death. In addition, they are private if you keep them that way, and can provide asset protection to your loved ones after your death, but does not provide asset protection to you during your life.
This brings us to the irrevocable living trust, they are also created while living and are MOSTLY used for tax planning and asset protection. Unlike the revocable living trust, the irrevocable living trust does give asset protection to you during your life, and to your loved ones after your death. It can protect your assets from nursing homes, predators, lawsuits, and all kinds of other things.
One very important point when creating a trust is that you really want to use a trust instead of the beneficiary designations. Some people have both, a trust and a beneficiary designation, there is generally not a good reason for this, and can cause a lot of problems for you and your family in the future. Here is the thing, if you have bank accounts, 401ks, IRAs, etc., and you have a beneficiary designation on these accounts they are NOT going to pass according to your trust or will, the beneficiary designation will control regardless of what your trust says.
In addition beneficiary designations do not protect your assets when your children get divorced, get sued, have poor spending habits, are in bad money relationships where the husband or wife goes and spends all of the money, have issues with addiction, have creditors, go through bankruptcy, need nursing home care, or are unable to manage their own affairs, amongst other things.
Please be very careful when your bank or your financial advisor tells you that your beneficiary designations are all set because beneficiary designations do not protect you on the abovementioned and typically these are things you want to be protected from. This can only be achieved with a properly funded trust.
What does it mean to properly fund a trust?
Funding the trust is the process of moving your assets into the trust. Think of the trust as an empty bowl of fruit, and your assets as the oranges, apples, bananas, etc. You will need to take the various fruits and move them into the bowl. They will continue to be the same fruit once you move them, but they are now in your trust/bowl.
An unfunded trust isn’t worth the paper it is written on. You just have an expensive legal document that is not actually doing anything for you. Also, understand that when your trust is unfunded a lot of times what this means is that you are going to end up in probate anyway. So the reason that you set up the trust is not even going to happen. Your trust is going to be empty and it is not going to protect your assets from probate.
Finally, there is something called “Death” Trusts or Testamentary Trusts. These are trusts created in a will which does not exist during your life, and that does not transition control of the assets in the event of disability, and will require probate (court) proceeding.
Lazaro Cardenas, Esq. is a partner at Patel, Soltis & Cardenas with offices in Jersey City and Hackensack. He focuses on Trust and Estate law. For more information or to set up a consultation please visit www.Focusedlaw.com, email us at [email protected] or call us at 844.533.3367. As with any legal matter, each person’s set of circumstances varies and this article is not intended to provide legal advice for your specific situation, but to provide an overview of trusts.