My recounting of a Constitute Day Lesson from a few years back.
What Is A Trust?
A trust is a transfer of property or assets to one person (the trustee) for the benefit of another (the beneficiary). The person who establishes the trust is often called the grantor or settlor. The terms of the trust are normally set down in a written instrument.
The grantor, trustee, and beneficiaries of the trust can be either “natural” persons (that is, you or I) or institutions, such as a trust corporation or non-profit organization. Moreover, because a grantor, trustee, and beneficiary are all legal capacities, one person can be all three. (In fact, this is a common arrangement for certain living trusts, discussed later.)
There are many types of trusts. For basic estate planning purposes, however, there are two types: testamentary trusts and living (inter vivos) trusts.
• A testamentary trust is one provided for in a will. Because a will does not take effect until you die, the trust is created only after the will is probated and funds are transferred to the trustee.
• A living trust is one established during your lifetime. This kind of trust becomes effective when you sign the trust instrument and transfer assets to the trustee. But, it typically remains effective after you die.
A will containing provisions for a testamentary trust is typically witnessed by two unrelated persons and notarized. A living trust agreement is typically notarized.
Living trusts are increasingly used as “will substitutes” — that is, instruments that meet your wishes in ways similar to a will but with other advantages. These living trusts typically work with “pour over” wills, which “pour” assets in your estate into your trust.
What Are The Benefits Of A Trust?
Trusts are beneficial whenever you wish to provide assets or income to another person but also preserve the assets or income, either for the beneficiary himself or for other beneficiaries.
In estate plans, trusts are typically used to provide for dependent children over the course of some years. The testator/grantor can select a person or institution to hold assets for the benefit of child, direct the purposes for spending income or assets, and provide for distributions as the child reaches certain ages (e.g., half at age 25, half at age 30). This trust avoids the limitations imposed on a guardian of a minor’s property.
Trusts are also very useful to provide for adult disabled children, disabled parents or siblings -- called “special needs” trusts. These trusts can assure a lasting fund for the expenses of the beneficiary. They can also provide supplemental assistance for the beneficiary without supplanting income or assistance from governmental sources, such as Medicaid and Social Security.
You can also establish a trust for one who is financially vulnerable — these are called “spendthrift trusts”. These trusts are exempted, to a certain amount, from the ordinary debts of the spendthrift beneficiary. Spendthrift provisions can be built in to any trust, but cannot protect a grantor from his own debts.
You can use a trust to provide for a spouse or child during his or her lifetime, while preserving the assets for others, such as children by a prior marriage. These trusts can take advantage of tax laws to reduce the taxes that might otherwise be paid.
Do Living Trusts Offer Any Special Benefits?
Because a living trust is not a testamentary trust, neither the trust nor the assets in it are generally subject to probate. This means that the assets actually in the trust when you die are not counted in assessing the probate tax and filing fees, and the trustee is not subject to the same accounting requirements as an executor or testamentary trustee may be.
Virginia continues to simplify the probate process. Testamentary trustees are now exempt from filing yearly accountings for the trust (unless the testator requires it). Likewise, virtually any out-of-state person can qualify as a testamentary trustee. The costs of probate are relatively low in Virginia, typically amounting to about 25 cents on $100 in value (that is, .25%) Thus, the value of your estate and your specific circumstances and concerns may make the non-probate aspect of a living trust more or less attractive.
Even if avoiding probate in Virginia is not a priority, a living trust can be helpful in avoiding ancillary probate of real estate in other states -- particularly states with complex or expensive probate -- to the extent that the property is in the trust when you die.
Unlike a will, which is recorded at the local courthouse, a living trust is not recorded and, therefore, offers greater privacy for your estate plan.
Living trusts can provide for continuing management of assets in case of disability. In a living trust, the grantor, trustee, and beneficiary are initially the same person; by naming successor trustees, the grantor can provide for an orderly switch in responsibility over trust assets.
Certain types of living trusts contain estate tax saving provisions.
What Kind of Assets Can You Put Into A Trust?
Generally, a living trust is more effective if you have actually transferred assets into it prior to your death. You can transfer many kinds of assets and property into a trust; though, some assets are better not transferred.
- Cash, bank accounts and certificates, and mutual funds can be transferred by simply changing the title through the institution holding the account. Likewise, stocks and bonds can be re-registered in the name of the trust.
- Real estate must be transferred by means of deed to the trust or trustee.
- The transfer of interests in closely-held corporations and partnerships are typically governed by partnership and operating agreements and the applicable tax laws.
- Trusts or trustees are often beneficiaries of life insurance policies. In some cases, the policy itself would be transferred to the trust or owned by the trust from the outset. These trusts — called irrevocable life insurance trusts — are generally established to provide for beneficiaries and to avoid or limit estate taxes; as such, they are not typical living trusts.
Accumulated retirement plans are typically not transferred to a trust, because of the possible income tax affects. But, depending on your estate planning needs, a trust might be named as a beneficiary of these plans.
Can You Change Or Revoke A Trust?
The terms of a testamentary trust can be changed or revoked by executing what is known as a codicil, which is simply an amendment to your original will. A codicil requires the same formalities as a will.
Living trusts are typically revocable -- that is, the grantor reserves the right to change the trust terms or revoke the trust altogether. In these cases, you can make changes by executing a trust amendment, and revoke the trust by executing a simple revocation. (Where you also use a “pour over” will, you should be very careful in revoking the accompanying trust.)
Living trusts are generally irrevocable upon your death. To this extent, a living trust functions like a will, in that the terms are fixed.
As noted above, some trusts are irrevocable. These trusts are typically used to remove assets from your estate, in order to avoid or limit estate taxes on the assets in the trust. The “asset” most often transferred to or owned by the trust is life insurance, since the value of the insurance is often low during the lifetime of the grantor. The proceeds paid upon the grantor’s death is often not taxable for any purpose.
What Is A Will & Why The Formalities?
A will is a written document that details your wishes about the passing of your assets at your death. Specifically, it spells out who should receive what assets, and how your estate will be settled.
The term “will” has long been used as a shorthand form of “last will and testament”. Thus, the person who makes a will is known as the “testator”, and things concerning a will are “testamentary”.
There are two basic types of wills: attested and holographic.
- An attested will is the most common type. It is typewritten, and signed by you in the presence of two witnesses who also sign the document. The process of signing and attesting is known as "executing" a will. When clearly written and correctly executed, this type of will is always preferable.
- A holographic will is one written entirely in your own handwriting but notwitnessed. This kind of will can be proven only by those who know your handwriting very well and can testify to the authenticity of the will.
Most attested wills now include a self-proving affidavit. This affidavit "proves" the authenticity of the will, and is signed by you, by the witnesses to the will, and by a notary public. Without this affidavit, the witnesses to the will must testify (by affidavit or otherwise) to its authenticity after your death.
Your will is an important document because it “speaks” at your death. The formalities are required to help ensure that the will expresses your genuine desires, since you can no longer express them yourself, and that you make your will freely, without any coercion or fraud from others.
What Assets Pass By Your Will?
A century ago, most of your assets would have passed by your will; today, however, most would not. Your assets can be classified as either “probate” – that is, assets that would pass under your will or, without a will, by intestate succession – and “nonprobate” – that is assets that pass outside your will, directly and without intervention of the court.
Probate assets include anything that you own in your name alone or in common with others (partial ownership), or that is payable directly to your estate.
Non-probate assets include:
• jointly-owned assets with right of survivorship (such as between spouses);
• beneficiary designations (life insurance, retirement plans, pay-on-death accounts);
• assets in a trust that you set-up during your life;
• other assets passing “by operation of law” (such as life estates).
What Happens Without A Will?
Non-probate assets would pass directly, with or without a will.
Assets that would pass under your will passes to your heirs, who are determined by Virginia's “intestacy” laws.
- If you have any children not by your current spouse, then your spouse receives 1/3 of your assets, and all of your children receive the remaining 2/3, in equal shares.
- If you have no children by a prior marriage, then your spouse receives all assets.
- If you have no living spouse, then your children receive your assets in equal shares – the children of any deceased child of yours would receive their parent’s share.
- If you have no living children, grandchildren, etc., then your parents receive your assets.
- If you have no living parent, then your brothers and sisters (or their children) receive the assets.
- If you have no living brothers and sisters (or their descendants), then your next of kin divide your assets.
The court appoints an administrator to settle your personal estate, which includes everything that is not real estate. The administrator must first pay your debts, taxes, and other expenses of administration before distributing the assets to your heirs.
Your real estate goes directly to your heirs; however, this often creates partial ownership of assets, which may make the sale of the real estate costly and involved.
If your estate does not have enough personal assets to pay debts, taxes, etc., then your real estate might be sold to pay these.
During the first month following your death, your surviving spouse or next of kin has the first preference to be appointed administrator (at the court's discretion). After this, other interested persons, even your creditors, may ask to be appointed, after giving written notice to those who would otherwise receive your estate.
Typically, the court will require your administrator to post a bond with surety, which is an insurance against the administrator stealing or misusing estate assets. This can be costly.
What Are The Benefits Of A Will?
- Generally, you can express your wishes clearly, and you can tailor your estate to meet these wishes.
- You can give particular assets to particular persons. You can also give assets to your friends, charities, or other persons who would not otherwise inherit from you
- For tangible personal assets (such as jewelry, china, or coin collections), you can attach a list to your will giving away particular items to particular persons. You can change this list without changing your will.
- You can make unequal gifts. For example, you can give more to a family member who has a greater need.
- You can set-up trusts for those who are young, elderly, disabled, or financially vulnerable.
- You can provide for contingent beneficiaries.
- You can name persons you trust most to serve as executor of your estate or guardian for your minor children.
- You can give your executor a variety of additional powers that would help him or her settle your estate (for example, the power to sell your real estate, or settle disputes about your tangible assets).
- You can ask the court to waive surety for your executor, trustee, or guardian. Typically, your request will be honored.
How Can You Change Or Revoke Your Will?
You can change your will at any time by executing what is known as a codicil, which is simply an amendment to your original Will. A codicil requires the same formalities as a will.
You can revoke your will (in whole or in part) at any time by simply destroying the original, or by crossing through the provisions of your will. This method of revoking your will is very risky, however, because you may be left with no will at all, a will that cannot be honored or understood, or serious questions about whether you, or someone else, destroyed or marked through your will.
The best method of revoking or changing your will is to make a new will. In this way, you can revoke any prior will and make any changes that you desire, without risking dying intestate or raising doubts about authenticity or intentions.