Estate Planning Trusts

A will can’t override an existing trust and cannot be used to manage assets already held in a trust. Assets placed in a trust belong to the trust rather than the estate of the person who died, which means they do not have to meet the terms indicated in a will. The terms of the will are only applicable to assets that remain in the estate. Assets in a trust are legally owned by the trust and are not impacted by the terms of the will. It is important to note that someone can indicate in their will that they would like certain assets from their estate to be transferred into a trust, whether the trust already exists or a new trust needs to be established. 

Although wills and trusts are generally used together in estate planning, it is possible for them to conflict in certain circumstances. When conflicts exist between a will and a trust, the instructions in the trust will prevail over the will. For example, suppose the will indicates that the person who died wishes property such as the family home to be distributed to specific relatives or loved ones. If that same property is included in the trust, the property would be distributed according to the instructions of the trust since it would be a legally owned asset of the trust rather than belonging to the estate. 

Wills and trusts are not intended to supersede each other. Individuals who are in the process of estate planning are encouraged to work with experienced professionals to avoid any potential legal conflicts. Working with an established estate planning lawyer will ensure that trust, will and other important documents are formulated in a consistent manner that will reduce the risk of conflict. 

Sources

“Does a Will Override a Trust?” SmartAsset. https://smartasset.com/estate-planning/does-a-will-override-a-trust 

“What Happens When a Will and a Revocable Trust Conflict?” Investopedia. https://www.investopedia.com/ask/answers/060915/what-happens-when-will-and-revocable-trust-conflict.asp 

A trust can be challenged or contested if someone has legal standing and a valid reason. Individuals are considered to have legal standing if they are directly affected by the execution of the trust. This means that individuals such as trust beneficiaries or successor trustees can potentially contest a trust. If the individual who created the trust, known as the trust grantor, has any heirs who were not included in the trust, they may also be eligible to contest the trust in court. 

If an individual has legal standing, they can only move forward with contesting the trust if they have a valid reason. They cannot contest the trust due to being displeased with elements such as selected beneficiaries or the distribution of assets. Some examples of valid reasons for contesting a trust can include: 

• If the trust was created by coercion or undue influence
• If the grantor was not mentally sound when the trust was made or changed 
• If the trust documents were forged by another individual 
• If the trustee is misusing trust assets 

Contesting a trust is subject to time limitations, which vary by state. For instance, under California law, beneficiaries must contest within 120 days of receiving notification of their inheritance. Similar practices are observed in other states, although some jurisdictions allow several years for trust contestation. 

If you’re considering contesting a trust, it is highly recommended to seek guidance from experienced legal counsel. They can help you understand the terms and restrictions of the trust in your state and navigate any potential complexities in trust litigation.

Sources

“Can a Trust Be Contested?” SmartAsset. https://smartasset.com/estate-planning/can-a-trust-be-contested 

“The 16061.7 Code: A Guide to Trust Beneficiary Notices in California”. Clear Estate. https://www.clearestate.com/en-us/blog/beneficiary-trust-notice-california 

After you have created a trust, the next step is to fund the trust, or legally transfer all of the assets to the trust. Depending on what kinds of assets are going into the trust, this is usually accomplished in one of several ways. 

Note: These are general guidelines for transferring personal property, not business interests, which are subject to different rules. Always consult with your attorney to discuss your specific situation and address any questions you may have.

Personal property without deeds or titles

Personal property in this category can be transferred to the trust by simply creating a general transfer document that says the assets are now the property of the trust. The document can list the assets in broad categories (furniture, jewelry, clothing, etc.) rather than listing each item separately. With that being said, if you are transferring property that is particularly valuable or unique (for example, an heirloom piece of jewelry or a work of art), it’s a good idea to list those items separately. When the document is complete, sign it and keep it with the other trust records. 

Bank accounts and other financial accounts

To transfer financial assets from your name to the trust, you will need to provide the financial institution with certain documents, which it will supply. They may also ask for a 

“Certificate of Trust” form to provide details about the trust or, in some cases, a complete copy of the trust documents. You will also need to request that the accounts be titled in the name of the trust. Usually, the account numbers will stay the same, but some banks may assign new account numbers when the accounts are titled in the name of the trust.  

Real estate

Transferring real estate is a little more complicated than transferring personal property because it involves transferring ownership with a deed. The process also differs from state to state, and each county may have different requirements. Thus, your first step should be to contact your County Recorder to learn exactly what you need to do. They may be able to provide you with a blank deed template or tell you how to format the deed. 

Once you have created a deed transferring ownership to the trustee of the trust, you will also need to record the deed in accordance with the requirements of the county where you live. This will probably include filling out certain forms, including a document that identifies the beneficiaries of the trust. You can typically record the deed in person or submit the original through the mail. 

Life insurance policies

As a rule, the ownership of any life insurance policies does not need to be transferred to the trustee of the trust. However, you may want to give some thought as to whether to designate the trust (versus individuals) as the beneficiaries. This may be useful if the current beneficiaries are young children and you want the proceeds protected by the terms of the trust. 

Sources

“How to Fund a Trust: A Step-By-Step Guide”. Trust & Will. https://trustandwill.com/learn/how-to-fund-a-trust

An “AB” trust can help reduce exposure to estate taxes for married couples with joint trusts. Under an AB trust, the estate’s assets are allocated to two separate trusts upon the death of a spouse. The first trust, sometimes referred to as the “A trust” or the “survivor’s trust,” remains revocable, and the assets are controlled by the surviving spouse. The second trust, sometimes referred to as the “B trust,” “decedent’s trust,” “bypass trust” or “credit shelter trust,” becomes irrevocable after the death of the first spouse.

The assets of the B trust typically can be used by the surviving spouse during his or her lifetime. However, sometimes the B trust only benefits other people, such as the children from the first marriage, rather than the spouse of the second marriage. After the surviving spouse dies, the assets of the B trust are then distributed to third-party beneficiaries, such as the couple’s children. 

The assets of the bypass trust are not considered part of the surviving spouse’s estate. They pass to the third-party beneficiaries free of estate tax by using the estate tax exemption of the first spouse. 

Keep in mind, however, that a large portion of your assets may not be subject to estate taxes at all. As of 2020, only assets in excess of $11.58 million were taxable by the federal government, and that amount increased to $11.7 million in 2021. (Double those amounts for married couples.) The tax rate for amounts above that threshold is as high as 40%, but that number only applies to very large estates. 

Additionally, most states don’t levy an estate tax, although those that do have much lower thresholds than the IRS. Before investing the time and money to set up an AB trust, you may want to consider speaking with a tax professional to determine exactly what your exposure may be. 

Sources

“A-B Trust: Definition, How It Works, and Tax Benefits”. Investopedia. https://www.investopedia.com/terms/a/a-b-trust.asp 

“Joint Trusts or Separate Trusts: Advice for Married Couples”. Kiplinger. https://www.kiplinger.com/retirement/estate-planning/601782/joint-trusts-or-separate-trusts-advice-for-married-couples 

“Estate Tax: Definition, Tax Rates and Who Pays”. NerdWallet. https://www.nerdwallet.com/article/taxes/estate-tax

Whether you need a trust or not depends on what assets you own, the total size of your “probate” estate, state law and the unique circumstances of your family. A trust can be beneficial for people in a variety of situations. You should at least consider setting up a living trust under any of the following circumstances:

• You have minor children
• You own real property (a house, a condo, land)
• You have accounts over $50,000 or $100,000 (depending on what triggers a probate in your state)
• You are in a state where the probate process is particularly complex or time-consuming
• You and your spouse have total assets (including proceeds of life insurance) over $2 million
• You have family or beneficiaries on public benefits or with creditor problems
• You want to protect the assets inherited by your children or beneficiaries from their current or future spouses or future lawsuits

Keep in mind, however, that if your main reason for setting up a revocable living trust is to avoid probate, you may be able to accomplish the same end without the time and expense of setting up a trust. For instance, any asset that has a named beneficiary, such as a retirement account or insurance policy, is exempt from probate, so some of your assets may be shielded in that way. Real estate can be titled in joint tenancy, so that ownership automatically transfers to the surviving owner upon your death — no probate involved. You can also set up a payable upon death account, which will be paid out to the named beneficiary upon your death. 

Living trusts have become quite fashionable in recent years, and for some people, they make a great deal of sense. However, they should always be created with the help of an attorney, which can be a rather steep expense (from $500 to several thousand dollars or more, according to AARP). With that being said, most attorneys offer a 30-minute consultation at low or no cost. So it may be worth consulting a lawyer who specializes in wills and trusts to find out whether or not a living trust makes sense for you.

Sources

“What Is Joint Tenancy in Property Ownership?” Investopedia. https://www.investopedia.com/terms/j/joint-tenancy.asp 

“The Pros and Cons of Living Trusts”. AARP. https://www.aarp.org/money/retirement/living-trust-uses/

A living trust is an agreement, set up and in effect while you are still alive, where you (the grantor or settlor) give property to a trust to be managed by a trustee. It also names beneficiaries who will receive the assets of the trust after the grantor’s death. 

Any kind of property may be placed in a living trust, including the following:

• Real estate
• Vehicles
• Investment property
• Bank accounts
• Digital assets such as intellectual property or Bitcoin

Irrevocable versus revocable living trust

There are two types of living trusts: revocable and irrevocable. By far the most common is the revocable living trust, in which the grantor has the ability to designate themselves as the trustee and retain control of the assets placed in the trust. They also retain the right to make changes to the trust — for example, by moving assets in or out of the trust or by changing beneficiaries. Importantly, when the grantor appoints themselves as trustee, the assets of the trust remain part of that person’s estate, and may be subject to estate taxes if their value exceeds the exemption allowed by the IRS. Any income earned by the trust must also be reported on the grantor’s tax return. 

In the event that the grantor of a revocable living trust becomes incapacitated, a successor trustee whom the grantor names would take over and administer the trust assets while the grantor is still alive. After their death, the successor trustee would then distribute the trust assets to the trust beneficiaries. 

An irrevocable living trust, on the other hand, is a trust that is legally owned and controlled by the trustee. The grantor relinquishes most of their rights to control the trust and cannot make changes once the trust agreement is signed. Because the grantor has no control over the trust assets, they are not subject to estate taxes when that person dies.

One benefit of a living trust is that property held in the trust at the time of the grantor’s death is not subject to probate, so a living trust may save the beneficiaries thousands of dollars in legal expenses and more quickly expedite the distribution of assets. A living trust will not, however, shield assets from creditors except in some cases of an irrevocable trust. However, setting up such a trust must be done very carefully to comply with tax regulations and laws against fraudulent conveyances (e.g., laws that prevent debtors from defrauding creditors). If you have questions about setting up creditor-protected trusts, please consult with an attorney.

Sources 

“What Is a Living Trust?” Investopedia. https://www.investopedia.com/terms/l/living-trust.asp