Trusts as Part of Your Estate Plan

Kristen R. Testaverde, Esq.

Wondering how or if a trust fits into your estate plan?  Many people do not consider trusts because they believe trusts are only for people with more substantial wealth and assets.  Trusts however, are often appropriate in many estate plans and for people with various levels of wealth. 

To begin, a trust is a method of owning and managing property.  To create a trust, ownership of the property is split  into a legal interest and an equitable interest.  The trustee of the trust will hold the legal interest.  This means the trustee holds the legal title to the trust property.  He/she has all the responsibilities of property ownership, but none of the benefits.  The trustee acts in a fiduciary capacity on behalf of the beneficiaries of the trust.  He/she must use reasonable care when dealing with trust property and maintain the utmost degree of loyalty to the beneficiaries.  In short, the trustee is the caretaker of the property and is responsible for making sure the property is managed appropriately for the beneficiaries.   The equitable (or beneficial) interest is held by the trust beneficiaries.  Beneficiaries receive the financial benefits of the trust and have the right to enforce performance of the trust, but have little control over the property itself.

A Practical Example:  A parent wants to ensure his/her child is taken care of in the event the parent passes on while the child is still a minor.  The parent creates a trust naming an individual in whom he/she has confidence in to act as trustee of a trust for the benefit of the child.  Note that this person does not necessarily need to be the individual who will act as the child’s guardian.  The trustee will have legal ownership of the property and a duty to ensure that the property is used for the child’s interest.  The child will receive the financial benefits, as he/she will be the trust beneficiary and hold the equitable interest.  The trustee, for example, can use the funds to pay for the child’s various needs, such as food, clothing, education and entertainment.  Typically, a family will create the trust and never actually provide property thereto, it exists as more as a safeguard.  The parent can name the trust as the beneficiary of his/her life insurance policy, for example.  (Note that this is a simplified example and those considering trust creation should discuss the aspects thereof with legal counsel). 

The purpose of a trust is to provide for and protect the trust beneficiaries, as an outright gift of the property may not effectuate the donor’s (person giving the property) true intent.  Minors, for example, lack legal capacity to manage property, as well as the maturity to do so.  A trust allows for a gift to be made to a minor without giving the minor control over the property.  Some individuals also lack management skills, even in adulthood.  This can be attributed to a lack of experience with investments, or mental or physical incapacity.  Further, some people simply do not want the responsibility, or could be susceptible to influence (think of an elderly person).  Spendthrifts are another example.  Spendthrifts are those who use money in an excessive manner and a trust can protect that property from creditors and from the beneficiary assigning his interest to another.  A supplemental or special needs trust is useful for an individual with special needs who receives government assistance.  Such a trust can be used to pay directly for that person’s expenses, thus not disqualifying him/her from receiving government benefits because his/her income or assets exceeds the required limits.            

A trust can also be helpful in that assets placed in a trust during lifetime will avoid the probate process.  Thus, in the example above, the life insurance policy will be readily available for the child through the trust, rather than having to wait for the funds to go through the often lengthy probate process (see my post ,”What is Probate,” for a further explanation of the probate process).     

There are many different types of trusts which are applicable in many different circumstances.  In addition to those purposes listed above, trusts can be used to hold title to real property, create tax benefits, or plan for long-term care needs.  In short, a trust may be appropriate for your estate plan and is worth exploring with your legal professional.

Questions or comments?  Leave a post or contact Attorney Testaverde at krtestaverde@gmail.com