The Estate Planning Attorney answers, “What is a trust, and how are they handled?”
What is a trust, and how are they handled?
The Estate Planning Attorney Answers:
A trust is an arrangement to hold title to and manage your assets. After your death, a successor trustee would continue to manage the trust assets for the benefit of your children who are the beneficiaries of the trust. Many parents prefer to create a trust so that assets can be held in trust rather than in the guardianship. The trust can be set up in your will to take effect at your death (commonly called a “testamentary trust”) or can be part of your living trust. Because the trustee is not appointed by the court, the trustee is not subject to many rules and restrictions imposed by the court.
The following are some reasons why many people include a trust in their estate plans:
a) Saves time and expense: Because a trust can be set up before your death, there is no need for court approval of the trust or the trustee, thus saving the time and expense of court proceedings.
b) Less court supervision: Unless specified in your will, a trust does not require the same level of court supervision as a guardianship of the estate. For example, a guardian of the estate must file an accounting with the court after the first year of the guardianship and at least every other year thereafter, but a trustee need only account to the beneficiaries (your children), at most, once a year. This saves the expenses of court hearings. Also, a guardianship of the estate often requires court approval for some financial transactions involving guardianship assets, whereas a trustee has more flexibility in dealing with trust assets. This lack of court supervision may or may not be an advantage depending on the financial sophistication of the trustee.
c) Flexibility of termination date: By law, the guardianship will terminate when your child reaches the age 18 and becomes a legal adult. Thus, your child will receive his or her share of your estate regardless of ability to manage financial assets. This can cause obvious problems if the child is not ready to handle his or her own affairs. A trust allows you to postpone distribution past the age of 18.
d) Flexibility in providing for the different needs of each child: If you have more than one child, a separate guardianship is required for each child and the assets of the guardianship can only benefit that child. This can pose a dilemma if one child has special needs that requires additional assets. If the assets belonging to one child are depleted because of unusual expenses such as special medical or educational needs, assets belonging to siblings cannot be used. However, if all the assets are in trust, the trustee has the authority to allocate assets according to the different needs of each child. Distributions on behalf of each child is limited only by the language of the trust.