Setting up a trust can be a very helpful way to put plans in place for our assets—and future care needs too. Experts remind us, however, that trusts are not a magic wand for safeguarding money or avoiding family stress and conflict. Effectively setting up a trust requires careful decision making. Here are some helpful pointers.
Revocable or Irrevocable?
Generally, although trusts can be established to accomplish a variety of goals, the legal structure falls under one of two categories: revocable or irrevocable. Revocable trusts are the most common type of trust, and, just as the name implies, a revocable trust allows the person establishing it, referred to as the grantor, to retain control of the assets placed in it and freely make adjustments. While this flexibility can be helpful, keep in mind that, as attorneys at Kyle E. Krull point out, revocable trusts do not guarantee the protection of assets from creditors:
Assets can be easily removed from the trust when revocable, and the trust itself can even be dissolved at any time.The amount of access the trustmaker still retains over a revocable trust attaches the trust and its assets to the trustmaker.This means creditors can make claims on the assets titled to the revocable trust. A court can order debts or lawsuits paid from trust assets.
Additionally, trust assets are used to determine net worth in bankruptcy proceedings.
An irrevocable trust does offer more protection from creditors but, as the name implies, is hard to change and requires relinquishing ownership of the designated assets. Because of this, irrevocable trusts provide greater protection from creditors. Experts distinguish irrevocable trusts this way:
Unlike revocable trusts, an irrevocable trust is a separate entity from the person who creates it.
Assets placed in the trust are gifted to the trust and are no longer the property of the person who created the trust. The trustmaker has no further control of the assets. Instead, the assets are governed by the rules of the trust outlined at its creation.Are there exceptions to irrevocable trust protections from lawsuits and creditors?Yes.States have varying laws on these protections.
Common exceptions include if the trustmaker is also a named beneficiary or if the court determines the trustmaker used the trust to commit fraud with creditors.
Clarity on family goals is important when determining what type of trust will be best. For example, since irrevocable trusts require the relinquishment of assets, they can be a particularly effective tool for families anticipating the need for public benefits to assist special needs individuals or elders who may require long term care. Either revocable or irrevocable trusts can be helpful for families seeking privacy and speed in transferring assets to designated beneficiaries, since assets gifted through trusts do not go through the public probate process, as assets left in a will do.
It’s important to keep in mind that though it does take some time, there is nothing inherently wrong with the probate process—and in fact, probate can be helpful under some circumstances. When opting for a trust, be sure to put enough detail into the agreement to make the purpose and conditions of it clear. It’s also vital 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 state law. 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.
Avoid This Mistake
When establishing a trust, it is imperative to pay attention to the terms spelled out in the agreement. From then forward, those terms must be adhered to, or properly amended. Haphazard actions can lead to stress and conflict in families. The American Academy of Estate Planning Attorneys offers this example of mistakes to avoid, based on the affairs of Lisa Marie Presley:
Whenever you amend a Trust or exercise a power granted to you in a Trust or any other legal document, it’s vital to follow the terms of the instrument granting the power precisely. In Lisa Marie’s case, the Promenade Trust required that notice of the amendment be given to the then-acting trustees. Priscilla alleges that she never received that notice. While notice may seem trivial, it’s not. Lisa Marie’s failure to provide the required notice has led to grandmother, Priscilla, suing her granddaughter, Riley. It’s all the more heartbreaking when you consider that Lisa Marie died just a few weeks ago and the lawsuit has already been filed. It seems that the new trustees were to take over upon Lisa Marie’s death, but even that’s a bit unclear because the amendment names a now-deceased individual to serve as trustee.
No family sets out to end up in court but it’s helpful to know that when there’s litigation, court or fiduciary bonds are often required. Keep in mind that Colonial Surety provides easy and speedy online bonds to meet the requirements of courts across the country.
In addition to providing bonds directly to the general public, Colonial offers The Partnership Account® for Attorneys . This free business service provides user-friendly client management dashboards, enabling attorneys to easily coordinate, view, complete and e-file the court and fiduciary bonds clients need. See for yourself today: The Partnership Account® for Attorneys.
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