A Potential Powerful Tool for Estate Planning and Asset Management

A trust may be a useful legal tool to manage property, both in life and after death. The basic way in which a trust is created is: on the intent of the grantor or settlor (the person whose property will make up the trust), the grantor transfers title of the property that will make up the trust, and names a trustee and beneficiaries.

In summary, the creation of a trust requires:

  1. Intent
  2. Property (also called “res” under the law)
  3. Trustee(s)
  4. Designated beneficiaries

If any of these elements are not met, the trust does not legally exist.

A trust will often include specific instructions on how to pay out the money – may be at a certain time, over certain intervals, or when beneficiaries reach a certain age. In this way, a trust allows the original owner of the money to control how the money is used after death, so long as it continues to have a lawful purpose. Furthermore, the trustee has a fiduciary duty and must therefore act in the best interests of the trust, its lawful purposes, and its beneficiaries.

The Testamentary Trust

A testamentary trust is formed at the death of the grantor. The most typical way a testamentary trust is created is, upon the grantor’s death, the grantor’sWill instructs that certain assets of the estate be used to form a trust. All the above aforementioned elements must be met to form a testamentary trust, with the Will forming the grantor’s intent and identifying the property that will form the trust and also naming the trustees and beneficiaries of the trust.

A testamentary trust can also be formed from so-called non-probate assets. These are assets like 401k’s, Individual Retirement Accounts (IRAs), or other investment accounts that don’t get distributed via the Will, but instead are Transfer-on-Death, or TOD. Most typically, upon death, TOD- type accounts will pass to the person or persons who are beneficiaries as designated by the account owner. But it is also possible to name a trust as a beneficiary. In this case, rather than having the assets of a retirement account go to a minor child, for example, with a testamentary trust in place, the assets would form the trust property (res) of the testamentary trust. The trustee could be instructed to pay the proceeds of the retirement account to the minor children upon a certain age, or at certain intervals, or as otherwise specified by the grantor.

Furthermore, a testamentary trust for Transfer-on-Death (TOD) style accounts, such as an IRA, can continue the tax advantages of these accounts while ensuring the assets are eventually distributed in accordance with the wishes of the grantor. Again, for example, a trust can protect against a minor child reaching age 18 and suddenly having access to large sum of money via inheritance from an IRA.

Creating a trust to receive retirement account or other TOD-type account assets can be a perilous endeavor without an experienced attorney working on your behalf. In addition to complying with applicable state laws that manage trusts, there are also important IRS rules and regulations that must be properly followed to ensure favorable tax treatment is not surrendered.

The Inter Vivos Trust

An inter vivos trust is a trust formed while the grantor is still alive. An inter vivos trust can be either revocable or irrevocable. A revocable inter vivos trust means that, while money or property has been placed in trust, the grantor has control to make changes to the trust, to access and transfer the money. A grantor may, and usually does, act as the trust’s trustee. Often a co-trustee is named, whereby if the grantor becomes incapacitated, the trustee will use the money for the benefit of the grantor, and for beneficiaries upon the grantor’s death. A revocable trust becomes irrevocable on the death of the grantor. Remaining property in the trust would then either be distributed to beneficiaries, terminating the trust, or continue to be held in trust for the benefit of beneficiaries in accordance with the grantor’s instructions for the trust.

With an irrevocable inter vivos trust, meanwhile, the grantor has relinquished control and title to the property that makes up the trust. The property now belongs solely to the trust. This type of trust may be used for estate planning and tax purposes.

As with any Will, Trust, or Estate Planning, it is best to consult an attorney who will examine your needs in their entirety and work with you to help you achieve the results you desire.

Fred Antenberg is an attorney in Columbia, Maryland that handles Wills, Trusts, and Estate Planning matters in Howard County, Maryland, and surrounding counties. Call Fred at 410-730-4404.

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