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A trust is a legal arrangement where one person, usually called the grantor, transferor, or settlor who gives legal ownership of specific property to a second person (called a “trustee”) to use to benefit a third person (the “beneficiary”). Trusts are used for many reasons, but people often use them like wills to pass property to their beneficiaries. In some situations, trusts transfer property faster and cheaper than a will.
Benefits Of A Trust
Trusts are very flexible. Trusts can be for a charitable or private purpose. Trusts can be revocable or irrevocable. Trusts can be created in the lifetime of the grantor (a “living” or “inter vivos” trust) or at the death of the grantor (a “testamentary” trust).
Trusts can be used for any legal purpose. Examples of these purposes are the management of assets on behalf of family members or children in case their parents are disabled or die, protection against creditors, eliminating the need for probate, minimizing estate and other property transfer taxes, and control over insurance policies as well as control over businesses. Trusts are very popular in estate planning because property that is transferred by trust does not go through probate like a will. So, the fees related to probate are avoided. Trusts can also be used to lower the estate tax due for married couples with larger estates. Trusts are also often set up to provide for the health of an individual. Trusts can even be set up to care for a beloved animal after the death of the owner. Read the Law: MD Code Estates & Trusts § 14.5-407
Some of the most common reasons people set up trusts:
• Save time and money in settling the estate
• Avoid legal guardianship if they become disabled
• Avoid having their personal and financial matters made public
• Reduce the chance of a “will contest”
• Keep control in their family and out of the court system
Creating A Trust
In order to create a trust, the grantor writes a document called a Declaration of Trust. Technically, trusts do not need to be in writing, but execution of a trust is almost impossible unless it is in writing. Read the Law: MD Code Estates & Trusts § 14.5-406
After spending the time and money to create your perfect trust, make sure you fund it. Funding your trust means transferring assets into the trust. This requires you re-title assets from your name into the trust name. Name the trust as beneficiary for all of your retirement, insurance or investment accounts with beneficiary designations.
Funding a trust means retitling the assets and accounts that you wish the trust to control and placing those assets in the name of the trust. Sounds quite simple right? However when assets aren’t retitled in the name of the trust, it defeats the purpose of avoiding probate and/or the need for the court to appoint a conservatorship upon the incapacity of the grantor.
Related to the mistake of not funding the living trust at the beginning is the issue of making sure that the trust remains funded over time. This becomes critical whenever you purchase or refinance a home, because most banks will require the property to be in your own name, and not in the name of your trust, in order to complete the financing arrangements. Once the financing has completed, title on the property can be transferred back to the trust, but this final step is inadvertently forgotten.
When a person forgets to fund a trust, assets not in the name of the trust will be part of the probate estate. As part of a living trust plan, a “Pour Over Will” directs that assets not in trust or inadvertently left out of the trust is transferred into the trust upon the testator death. The court will still probate these assets, however the trust provisions control how and to whom the asset will be transferred.
To ensure that your living trust does exactly what you intend for it to do, always fund the trust and review your assets periodically to ensure that they are still in the name of the trust.
Not all trusts are the same. The type of trust you need depends on your estate planning goals.
A living trust is a legal document that is used to control the distribution of assets passed to beneficiaries upon death. Like a will, a trust can be revoked or changed during your life. A trust consists of a grantor (creator of the trust), a trustee (manager of the trust property after grantors death), and a beneficiary (person who benefits from and receives trust property). A grantor can put property into trust during his/her life. After the grantors death, a named trustee will be put in control to manage the distribution of the trust property to the beneficiaries. The trust can specify whether property is to be given outright or given in installments to each beneficiary. A trust is also an excellent way to minimize the property that passes through probate.
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