Probate court is a specialized type of court that deals with administration of an estate. If a person dies with a will, the will must be admitted to probate court before the assets in the estate can be distributed to beneficiaries. Probating a will can be a lengthy and complex process because:
- the authenticity of the will must be proven in court,
- an administrator of the estate must be appointed,
- creditors must be notified, and
- assets must be located and accounted for before they can be distributed to beneficiaries.
Many people choose to use estate planning tools other than a will in order to avoid probate due to the costs and complexities involved in probating a will. Some methods of distributing assets, like payable-on-death accounts, allow beneficiaries to receive assets automatically instead of going through probate court. The same is true with trusts. Trusts allow beneficiaries to avoid probate court. But there are also other advantages to utilizing trusts.
There are many different types of trusts, and which type will be recommended as part of a comprehensive estate plan will depend on the types of assets that will be placed in the trust and the wishes of the trust creator.
Types of Trusts
Most people only need one trust for distributing their assets, but unlike a will, it is not uncommon for a person to have more than one trust, which can be utilized for different purposes. Here are some of the more common trusts.
A revocable trust, also called a living trust, is a type of trust that allows property to be added or removed from the trust during the grantor's lifetime. The grantor of the trust may serve as the initial trustee or another trustee may be named. Usually, a revocable trust will >transition into an irrevocable trust upon the death of the trust grantor. This type of trust allows a great deal of flexibility but usually little or no creditor protection for the grantor(s) of the trust.
Once property is placed into an irrevocable trust, it cannot be removed by the trust grantor. An advantage of using an irrevocable trust is that it offers protection from creditors of both the grantor and the beneficiaries. The degree of protection depends on the extent to which the beneficiaries can demand distributions. If a beneficiary can demand a distribution, so can the beneficiary's creditors.
A testamentary trust is one that is created by a will but does not arise until the death of the testator. A testamentary trust can be modified during the testator's lifetime. A will may contain one or more testamentary trusts, and it may address all or some of the testator's estate. A living trust can also e used to create a testamentary trust that takes effect upon the trust creator's death.
A charitable trust is established to distribute money to a charitable institution. Some of the assets placed in a charitable trust can be deducted from the trust grantor's taxes during his or her lifetime. A charitable trust may also be a living trust or it can be created by a will. However, if any proceeds in the trust are distributed during the grantor's lifetime, the trust must be an irrevocable trust.
A spendthrift trust allows a trustee discretion regarding how trust assets will be spent for the benefit of beneficiaries named in the trust instrument. A trust will not be treated as a spendthrift trust unless the trust document contains a specific provision naming it as such. This may be an attractive option if there are concerns about how a beneficiary will spend the trust assets or if a trust beneficiary is a minor. Spendthrift trusts provide a high degree of creditor protection for the beneficiary. Most spendthrift trusts are third-party-settled trusts, meaning the trust is created by one person for the benefit of another. At common law, an individual could not create a spendthrift trust for his or her own benefit. However, some states do allow this. A domestic asset protection trust (DAPT) is a type of self-settled irrevocable trust that is permitted by statute in a limited number of states (including Alaska and Tennessee, among others) for the benefit of the trust grantor.
Special Needs Trust
A special needs trust is one that is created for a person who is receiving government benefits with the purpose of not disqualifying the individual for benefits. Ordinarily, a person who receives a gift or inheritance may be disqualified from receiving government benefits if the additional assets exceed a certain amount. A special needs trust can allow the beneficiary to receive certain luxuries or benefits without disqualifying them from receiving government benefits and can provide funding for future care.
A Totten trust is one that is generally used for accounts and cannot be used for real property. It is created by depositing money into an account at a financial institution in the grantor's name as the trustee and naming the assets in the account as payable on death to a beneficiary upon death. A Totten Trust is revocable.
If you have questions about trust administration or need assistance with estate planning in Arizona, Alaska, California, Colorado, Oregon, or Tennessee, contact Nina Whitehurst at Cumberland Legacy Law, located in Crossville, Tennessee. You can use our online form to schedule a consultation or call us at (931) 250-8585.