A trust is a legal agreement you use to name a person who will protect and care for the property you have given to another person. The person you name to oversee and protect the property in the trust is called a “trustee.” As the person who created the trust, you will be called a “settlor.”
There are two categories of trusts. A trust created during your life is called an inter vivos trust or living trust. A trust created in your will is called a testamentary trust.
There are other differences between a living trust and a testamentary trust. A living trust is created when you sign the document and may be revocable or irrevocable. Property is often placed in the living trust when it is created. A testamentary trust, on the other hand, is created in your will and is only effective after your death. No money is placed in the testamentary trust during your life. A testamentary trust also gives you the flexibility of revoking it any time before your death.
There are several types of testamentary trusts, but common ones used in estate planning are trusts for minor children, marital reduction (spousal) trusts, and spendthrift trusts.
In the event both parents pass away at the same time, a trust for minor children can help ensure the property inherited by your minor children is protected, invested, and available when your child reaches a certain age. It can also be useful if you are a single parent, widow(er) or have children from a previous marriage.
Property your child may inherit or which they receive as a beneficiary upon your death, such as your life insurance proceeds, can be placed in the trust. Not many 18-year-old children are mature enough to handle the financial responsibility that comes with inheriting property or money. With a trust for minor children, you can determine at what age your children should have full control over their inheritance. While the property is in the trust, your trustee can distribute money to your child’s health, education, and welfare needs.
A marital reduction trust can be used to give property to your spouse, so they can use it during their life. When your spouse passes away, then the property in the trust passes to your children or grandchildren. It is often used to avoid federal estate taxes when you have assets valued above the federal estate tax exemption, which is $11.4 million as of 2019. Instead of giving your property directly to your spouse and paying federal estate tax on the amount over $11.4 million, you can avoid the tax with this trust. If your spouse spends the money during their life, so their assets are valued below the federal estate tax exemption amount at the time of their death, then your spouse’s estate can avoid the federal estate tax.
When you want to provide property to your children or grandchildren who may lack financial responsibility a spendthrift trust can be very helpful. The beneficiary does not have direct access to the property in the trust. However, the trustee of a spendthrift trust can distribute the proceeds from the trust in the amount or for the purpose you describe.
One of the best benefits of a spendthrift trust is that it protects the property from the beneficiary’s creditors. Because the beneficiary does not have access to the trust, except at the discretion of the trustee or as directed by you, the property cannot be lost to creditors. You can feel comfortable that the beneficiary’s needs will be provided for and the property in the trust will not be wasted.
Contact the Law Office of Hugh Spires, Jr. to discuss which trust may be right for you. I will travel within 50 miles of Dallas, Texas or provide your documents through a secure web portal.