TO TRUST OR NOT TO TRUST?

TO TRUST OR NOT TO TRUST?

By Erik McCauley

What is a Trust and How Does it Help with Your Estate Plan?

When it comes to estate planning, most people know what a Will is and why they should have one. It’s one of the most basic documents for determining how someone wants to pass their estate – land, money, investments, cars, and personal items – to their family, friends, or institutions. While Wills have been around since time immemorial, estate laws have constantly changed and adapted to the needs of modern society. One of these changes has been the advent of the Trust, an increasingly popular and more versatile way of transferring and protecting estate assets.

Trusts come in a variety of types and can take effect before the grantor (the person creating the Trust) passes away. However, there is some confusion over why someone would need a Trust and when a Trust is better to use than a Will. This article will give a brief overview of the benefits of Trusts over a Will and will describe some Trust types that can be set up for specific purposes.

Benefits of a Trust Versus a Will

Probate Issues

One of the main advantages of a Trust is that it avoids probate, the process by which a Will is executed after a testator (the person who created the Will) dies. Probate normally must take place in the Circuit Court where the testator last had his or her residence, which can often be inconvenient for an executor (the person designated to administer the will) who lives far away. Probate can also take many months and sometimes years to finish up, especially if there is a dispute over the Will. Also, through the probate process Wills become part of the public record, meaning that anyone who wishes can later view the contents of the Will.

Trusts avoid all of these issues. A Trust can be set up before the grantor’s death and can take effect immediately, or the grantor can set a date when the Trust property passes to the beneficiaries (the people designated to receive the property, money, etc. in the Trust). Trusts do not become part of the public record, remaining private and giving a layer of protection to the beneficiaries.

Tax Benefits

While these Trust benefits are very helpful no matter the size of the estate, the biggest advantage to setting up a Trust often is the ability to reduce tax liability. While tax liability will vary widely depending on what is in the estate and the value thereof, anyone who owns real estate or at least modest investments can benefit greatly from setting up a Trust. For everyone, property that passes through a Trust, and thus avoids probate, also avoids the probate tax. In Virginia as of January 2015, the probate tax is 10 cents per $100.00 on estates valued at more than $15,000.00. While this may not be much at first, for larger estates it is an expense which can add up quickly and unnecessarily. Local governments may also impose a probate tax on top of the state probate tax, further adding to the financial burden of probate.

The tax benefits of Trusts also extend to reducing the amount of the estate subject to taxes. An irrevocable Trust, one that cannot be revoked by the grantor, may not be included in the grantor’s estate at his or her death, and therefore is not subject to an estate tax. Depending on how the Trust property passes, it may be taxed at the beneficiaries’ income tax rate, which may be lower. As of January 2015, Virginia effectively does not have an estate tax, but the federal estate tax applies to any estates with a value of over $5,430,000. While many will not have to worry about federal taxes, those with large estates or private business owners should seriously consider setting up one or more Trusts to avoid the federal estate tax, which as of 2015 is 40% on the estate’s value that exceeds the exemption amount.

Types of Trusts

Because the types of Trusts available vary depending on a person’s needs and circumstances, someone considering a Trust should carefully think about what he or she wants accomplished by the Trust both before and after death, if applicable.

Burial Trusts – This type of Trust provides the funds for the grantor’s funeral and burial. It can be revoked before the grantor’s death, but after death it becomes irrevocable.

Charitable Trusts – A Trust which allows the grantor to give tax-free donations to qualifying charities. These can also be set up to give only the interest generated by the Trust to the charities and the Trust property to pass to a designated beneficiary, such as a spouse, upon the grantor’s death or other date.

Spendthrift Trusts – This Trust type is set up for a beneficiary who cannot handle his or her own affairs. The beneficiary may be mentally incompetent or may have money troubles. The grantor can designate when and for what purposes the Trust property should be disbursed to the beneficiary. If the beneficiary has problems with creditors, the creditors normally cannot reach the Trust property itself; they can only pursue actual disbursements made to the beneficiary.

Testamentary Trusts – These Trusts are set up after a person’s death, normally by the person’s Will. These can also be combined with Wills to create what is known as a “pour-over will,” a Will in which certain assets or any assets not specifically mentioned in the Will can be “poured over” into one or more Trusts.

These are only a few examples of the Trust options available; in a later post we will discuss other types of Trusts and further benefits of a Trust. If you or someone you know is considering setting up a Will, Trust, or other estate planning document, contact Kristi Wooten and Erik McCauley at the Wooten Law Group, PLC for a consultation. We are estate planning lawyers located in Chesapeake, Virginia and we serve the entire Hampton Roads area. Give us a call at 757-452-4041 or e-mail us at kwooten@wootenlg.com and emccauley@wootenlg.com. We would be happy to help you with all your estate planning needs. We recommend that you evaluate your estate planning needs upon any life altering event, such as marriage or divorce, and then every five years.

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