For most people a Last Will and Testament serves as the foundation for their estate plan; however, a number of additional estate planning tools and strategies are also used to help complete a comprehensive estate plan. Among the most popular of these additional tools is a trust. Like most people, you likely have a general idea what a trust is and how it operates; however, you may also have a number of trust related questions. To help you better understands trusts and how one might fit into your overall estate plan, the estate planning attorneys at The Mendel Law Firm, L.P. have put together the following frequently asked trust related questions and corresponding answers. If you have specific questions, or would like additional information, please contact our office for a consultation.
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In its most simplistic term, a trust is a relationship whereby property is held by one party for the benefit of another. A trust is created by a Settlor, also referred to as a Grantor or Maker, who transfers property to a Trustee. The Trustee holds that property for the trust's beneficiaries. The average person enters into trust agreements all the time without realizing it. For example, imagine that you are in possession of a family heirloom that you eventually want handed down to a favorite niece; however, at the moment she is too young to be responsible for the heirloom. You decide to hand over the heirloom to your sister for safekeeping with the agreement that it will be passed down to your niece when she turns 25. You have created a rudimentary trust agreement in which you are the Settlor, your sister the Trustee and your niece the beneficiary. The family heirloom is the trust asset and the provision that is be disbursed to the beneficiary when she turns 25 completes the terms of the trust agreement.
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All trusts fall into one of two broad categories – testamentary and living trusts. A testamentary trust is one that does not take effect until the death of the Settlor and is usually triggered by a provision in the Settlor’s Last Will and Testament. A living trust, as the name implies, is a trust that takes effect during the lifetime of the Settlor.
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Living trusts can be further divided into revocable and irrevocable living trusts. A revocable living trust is one that can be modified, terminated or revoked at any time and for any reason by the Settlor. An irrevocable living trust, on the other hand, is one that cannot be modified, terminated, or revoked by the Settlor for any reason once it has been activated. While it is best to think of an irrevocable trust in these terms, the reality is that it is possible to modify or terminate an irrevocable trust in some cases; however, it usually requires the agreement of all beneficiaries and/or a court order. Because a testamentary trust is trigger by a Will, and a Will can always be revoked up to the time of the death of the Testator, a testamentary trust is always revocable as well – at least until it is triggered to activate following the Settlor’s death.
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A common mistake made by Settlors is to appoint the wrong person as Trustee. This generally happens because a Settlor does not have a clear picture of the numerous and varied duties of a Trustee, which may include:
- Understanding and following the trust terms
- Communicating with beneficiaries
- Managing trust assets
- Investing trust assets using the “prudent investor standard”
- Keeping detailed records of trust business
- Distributing assets pursuant to the trust terms
- Preparing and filing trust taxes
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There was a time when trusts were almost exclusively the domain of wealthy families who used trusts to control and pass down the family wealth from one generation to the next. Today, however, trust agreements are commonly found in the estate plan of the average person, due in large part to the flexibility offered by a trust and the multitude of estate planning goals that can be reached using a trust, including:
- Incapacity planning
- Probate avoidance
- Medicaid planning
- Charitable gifting
- Planning for parents with minor children
- Special needs planning
- Tax avoidance
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A trust may terminate for a variety of reasons, depending on the type of trust and the unique circumstances. If the trust is a revocable living trust, or a testamentary trust, the Settlor may terminate the trust at any time. Other ways in which a trust may terminate include:
- Provision in the trust setting a date for termination
- The trust purpose has been fulfilled
- Trust assets are depleted
- Subject matter of the trust becomes illegal or unconscionable
- The Trustee violates his/her duties to the trust
- A trust contest determines that the Settlor created the trust as the result of mistake, fraud, duress, or undue influence
- Agreement of the beneficiaries
- Court order
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