Using a trust in your estate plan can be a valuable tool, but many people are intimidated and confused when they hear the word “trust.” A trust conjures up images of your money being held with some large financial institution that manages the money and your beneficiaries having to beg that institution to gain access to the money in the trust.
The truth is, a trust is merely a person (or institution, such as a bank) holding money for the beneficiary of the trust. The person holding the money is called the trustee. The trustee and the beneficiary of the trust could be the same person, as long as there are other potential beneficiaries of the trust.
A trust could be created and funded during your lifetime. In this case, the trust would be called a living trust. Or the trust could be found in your last will and testament, in which case it is called a testamentary trust.
Taking all of this together, let’s give an example of a testamentary trust. Mr. Smith has a last will and testament. In his Will, Mr. Smith created a trust for his son, Robert. Since the trust is contained in Mr. Smith’s Will, the trust is a testamentary trust. A testamentary trust is simply additional words in the Will. For instance, Mr. Smith could have words in his Will that say: “Any share of my estate passing to Robert shall be held in trust for Robert’s health, maintenance, and support. Any asset remaining in the trust after the death of Robert shall pass to Robert’s children on an equal basis.” While most testamentary trusts would have more words than this, these two sentences do create a testamentary trust.
Robert could be named as the trustee of the testamentary trust that Mr. Smith created for him in his Will. So, Robert would be in control of the money in his trust. Robert, and no one else, would decide when the money comes out of the trust for Robert’s health, maintenance, and support, which is a very broad distribution standard.
So, if Robert is the primary beneficiary of the trust and the trustee, what is the value of creating a trust for Robert? Typically, assets held in a trust are protected from the beneficiary’s potential creditors. Many trusts have what are called “spendthrift clauses,” which protect the assets from the beneficiary’s creditors.
If Robert were to be sued, Robert’s creditors could not get at the money in the trust as long as the money remained in the trust, and if Robert simply paid his bill directly from the trust, instead of taking money out of the trust and putting into his personal account, then his creditors would never be able to get at the money.
If Robert were to get divorced, the money in the trust would not be subject to equitable distribution in the divorce. If Robert were to die, the money Mr. Smith left to him would pass to Robert’s children, Mr. Smith’s grandchildren, not Robert’ spouse.
Another issue that people have with trusts is the belief that there is some restriction on how the assets in the trust can be invested. People seem to think that a trust account is an account that has a specific type of investment. This is untrue. Robert could invest the assets of the trust any way he wishes; this is particularly true since Robert is the primary beneficiary of the trust.
The trust could invest in real estate, stocks, bonds, annuities, bank accounts, or any other myriad of investment vehicles. A trust could have one financial account or a hundred financial accounts. The only difference between an account in Robert’s name and an account in Robert’s trust is how the account is titled. Instead of the account being titled “Robert Smith,” the account in the name of the trust would be titled “Robert Smith, Trustee.”
A trust can be a very valuable estate planning technique. Many people don’t use trusts because they are intimidated by trusts, but this sense of intimidation is misplaced.