Because they can be customized based on circumstances and personal preferences, including a desire for privacy, trusts are very handy in estate planning. The legal underpinnings of all trusts are similar, but the variations on how they are arranged are many. Read on for an overview of secret, Totten, blind, rabbi and funeral trusts.
A Trust For Every Purpose
Though the specifics of trusts vary—and may sound complex—the legal fundamentals are quite straightforward: according to Collins Law Group, a trust “is a relationship whereby property is held by one party for the benefit of another….” That said, choices about how trusts are specifically set up—and communicated—vary greatly according to the intentions of the person establishing the trust, who may be referred to as the grantor, settlor, or trustor. While even “secret trusts” are possible, legal experts point out that secrecy and estate planning are not generally a good mix, given “the potential for estate litigation” down the road as family members unpleasantly surprised by “shadow arrangements” attempt to find legal solutions for their wounds. Nirenstein and Horowitz offer this example of a “secret trust”:
Let’s say that John has supported a significant other outside of wedlock for many years. He wants to leave her an inheritance, but he does not want the rest of the family to know about it.
John does confide in his brother, Bill, and he asks him to be the trustee of a secret trust. Bill is named as an inheritor in the will, but in actuality, the assets are to be used to fund a secret trust for the benefit of the paramour. This approach can also be taken in a semi-secret manner. A will would openly call for the creation of a trust, but all the terms would be secret.
A Totten trust, often referred to as a payable on death or transfer on death account, is another way to quietly arrange for assets to pass on to a designated beneficiary:
When you open up an account at a bank or a brokerage, you can name a beneficiary that would inherit the resources after your death. It should be noted that they would have no access to the funds while you are living.These are called payable on death or transfer on death accounts, and the alternate term for this type of account is a Totten trust. The transfer to the beneficiary would not be subject to the process of probate, which is a public proceeding. As a result, the transfer would be strictly confidential, so someone like John would do well to consider the utilization of a Totten trust.
Sometimes, the details of trust arrangements are based on vary pragmatic intentions as illustrated by both rabbi and funeral trusts. Estate planning experts insights point out how and when these types of trusts come in handy:
A rabbi trust is funded by a company that is providing compensation to an employee. They receive a tax deferral benefit when a portion of their compensation is conveyed into the trust.
….It should be noted that the involvement of an actual rabbi is not necessary. The trust got its name because the first time the IRS approved of its utilization, the beneficiary was a rabbi.
Some people want to spend freely during their retirement years, and they do not prioritize the inheritances that they will leave to their family members. At the same time, they want to make sure that they have set aside resources to cover their funeral expenses. Under these circumstances, an individual could fund a funeral trust. They would work with a funeral home that offers this option and fund the trust while they are living. After they pass away, the assets would be used to cover their final expenses.
Best Practices for Trusts
No matter what type of trust is used in estate planning, it is important to put enough detail into the agreement to make the purpose and conditions clear. It’s also essential to choose a reliable trustee. As lawyers remind us:“With a proper trust, there will not be court involvement which means this person will have no court oversight in how they do their duties as trustee—choose wisely!” In doing so, it’s best to begin by carefully considering the qualities, skills and time commitments a trustee will need to successfully administer the terms of the trust. Learn more about the essential duties of trustees right here.
Ultimately, whether a professional, friend, or relation is selected, the trustee has a fiduciary obligation to the beneficiaries—and must always exercise reasonable care and skill in managing the assets of the trust. Accordingly, the trust agreement may require a trustee bond, which is a specific type of fiduciary bond that protects the interests of the trust and its beneficiaries in accordance with applicable laws. As a leading national provider of many types of fiduciary bonds, Colonial Surety makes it easy and efficient to obtain a trustee bond. Just get a quote online, fill out the information, and enter a payment method. Print or e-file the bond from anywhere—even the law office.
Good To Know: Irrevocable or Revocable?
Though a wide variety of options are available to customize trusts for specific estate planning goals, trusts can generally be grouped into two buckets: irrevocable or revocable. Estate planning experts spell out this primary difference: “If the trust is a revocable living trust, as the name implies, the Settlor may modify or terminate the trust at any time. An irrevocable living trust, however, cannot be modified or revoked by the Settlor at any time nor for any reason unless a court grants the right to revoke or modify the trust.” More detailed information about trust law is available here.
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