Sometimes a simple Will just won’t accomplish a person’s estate-planning objectives! Wills are excellent tools for many people, and for some, all they will ever need to leave their worldly possessions to their loved ones. In this increasingly complex world we have created, though, many people are learning that they need a trust to accomplish their objectives. The purpose of this article is to touch on the highlights of using a trust for that purpose.
Let’s start with an example so we will have some context for our conversation.
Assume you are nearing retirement. While you still have many years ahead of you, (you hope) you would like the peace of mind that comes with having concrete plans in place for the future. One asset you own is a commercial building that stays rented with a steady cash-flow and the prospect of continued appreciation.
You fully intend to use that monthly cash to supplement your retirement, and if you die first, you would want that cash to supplement your spouse’s needs until her death.
Upon the second of you to die, though, you want that asset to pass to one or more of your children, or to be held for the benefit of a deceased child’s children until they become “of age”.
As you can see, there are many moving parts here, and if grandchildren are ever involved, there might be many years between your deaths and the grandchildren becoming adults. A simple Will just doesn’t have the flexibility needed to handle this scenario! Fortunately, a trust does.
Many people have heard of “revocable living trusts”, the most common type of trust we see. These trusts are created mainly to avoid probate at death by going into force now and taking ownership of a person’s assets, so when the person dies, they don’t own anything that has to go through probate. The trust owns the assets, and the trust language says who is to get the asset after the Settlor has died.
There is another type of trust that people often choose for a variety of reasons, though. In a testamentary trust, the individual owns his or her assets outright until his or her death. Their Will states that one or more assets will be held in a testamentary trust for the benefit of someone else for a period of time, and income is paid out during that time.
It is important to remember that these are both tools, and every tool is designed for a specific task. A hammer is a great tool, but you wouldn’t use it to work on a watch, for example. Depending on your goals, one of these trusts might be better than the other, so your lawyer can help you decide which is right for you.
The testamentary trust is ideal if you want to avoid changing ownership of an asset until your death and if you don’t mind your estate going through the probate process in order to be distributed. Some families benefit from having a neutral party overseeing this process, for example. Since it does require your Will to trigger the creation of the trust, the safety of your Will is needed. If there is a chance someone might destroy your Will to frustrate the creation of the trust, then the revocable living trust is better.
The revocable living trust is ideal if you don’t mind changing title on your assets now. You can still amend this trust and even revoke it if you wanted to, but it would require you to take steps to do so. Your ownership wouldn’t be compromised if your real estate were held in this type of trust. The income would still come to you each month. You can also place other assets into this sort of trust to avoid probate on those assets as well.
The testamentary trust requires the probate of your Will. This costs your loved ones several thousand dollars. The revocable living trust will be in place now, does not require probate to be done, but costs between $1,500-$3000 to be created.
Both trusts do what they are meant to do; they just go about it differently. Depending on your unique situation, one might be better than the other, so think about your needs and let’s discuss them more. There may be another option out there we haven’t even considered that will work too! It is nice to have options.
William G. Nolan
Elder Law Attorney
The Alabama Elder Care Law Firm, LLC
200 Office Park Dr., Ste 303
Mtn Brook, AL 35223
205/390-0101