Common Questions Clients Ask Us About Trusts

April 10, 2018

Planning for the end of life is one of our clients’ most difficult tasks. When developing an estate plan, trusts may be something you consider, regardless on an individual or family’s net worth. These are some of the most common questions clients ask us about trusts.

What is a Trust?

In general, a trust is an arrangement wherein an individual (trustee) holds a fiduciary relationship to transfer assets between a deceased or incapacitated person and his or her beneficiaries. A well-drafted trust will lower the costs associated with transferring property after death, such as avoiding probate, and can reduce taxation, distribute assets in a responsible manner, and protect beneficiaries.

Although there are many different kinds of trusts, such estate planning vehicles generally fall into one of two types:

• Revocable trusts
• Irrevocable trusts

Trusts in Arizona, Nevada, and California can be complex and require the attention of an administrator who understands the state and federal regulations governing the arrangement.

Who Needs a Trust?

Perhaps the most common misconception about trusts is that only wealthy individuals and families need a trust.  While most trusts do contain complex estate and generation skipping transfer tax provisions, which generally are taxes only impacting high net worth clients, a key component of a trust is to strategically draft provisions to distribute assets to beneficiaries in a financially responsible manner (i.e., spacing out distributions at responsible distribution ages rather than one lump-sum distribution too early on in a beneficiary’s like.)  Also, even if an individual or family’s assets are relatively modest, establishing and fully funding a trust can significantly decrease post-mortem administration expenses such as probate.  Each state handles these matters differently, so anyone holding assets in several states would be wise to consult with a legal team to arrange the best trust for their situation.

What is the Difference Between a Beneficiary and a Qualified Beneficiary per the Arizona Trust Code (ATC)?

The Arizona Trust Code (ATC) defines a beneficiary as anyone with an interest in the trust, whether vested or not. A qualified beneficiary holds direct interest. For instance, if a woman establishes a trust for her beneficiaries and dies, her husband and children are qualified beneficiaries. If one of her children dies before her husband and there is a grandchild, the grandchild would be a beneficiary, though not a qualified beneficiary.

What is the Difference Between a Trust and a Living Trust?

A trust is established on behalf of beneficiaries upon the death of the asset holder, whereas a living trust is established on behalf (primarily) of the owner of the assets should he/she become incapacitated, and then, upon the death of the owner, the living trust transitions to be for the benefit of other beneficiaries referenced in the living trust agreement.  One of the most commonly established types of trusts are known as “revocable living trusts.”

What is the Difference Between a Revocable and an Irrevocable Trust?

Generally, if a trust is not established as irrevocable, it can be revoked or altered; if irrevocable, no changes may be made once it is in place unless such changes are approved by a court or other unique circumstances exist.

How Long is a Trust Valid?

The length of time a trust remains valid depends on how it was written and the laws of the State which govern; essentially, a trust is implemented to ensure an efficient transfer of assets and once complete, it ends. However, the person establishing the trust may add clauses to ensure that his or her loved ones are cared for throughout life, extending the duration of validity well into the future.

Can I Change a Trust?

Revocable living trusts generally provide its creators to modify, amend, or revoke such trust during his, her, or their lives.  If a trust was established as an irrevocable trust or later becomes and irrevocable trust upon the death of the creator, the terms under the trust cannot be modified or amended, nor can the trust be terminated, unless specific facts and circumstances exist.

What is the Difference Between a Trust and a Will?

A Will is a legal document by which a living person states their desires for the disposal of their property upon death. Without such a document, the state laws of intestate succession control and court-supervised administration may occur. A valid Will allows a person to communicate specific decisions about their assets, which in turn can help avoid family arguments and potentially reduce the costs associated with settling the estate.

A Trust is an arrangement under which the Trustee holds legal title to property for the benefit of the Beneficiaries, the primary purpose of which is to avoid Probate. A Revocable Living Trust, or “Inter Vivos Trust”, is one that is created during an individual’s lifetime, whereas a Testamentary Trust is a Trust created after an individual’s death according to the provisions in his or her Will.

Clients establishing a trust still will need to have a Will in place, but it often is a simplified version of a Will known as a “Pour-Over Will,” which coincide’s with the client’s Trust.

Do I Need a Power of Attorney if I Have a Living Trust?

Yes. Because trusts are limited to only those assets included in the trust, a power of attorney is still needed to manage the whole of the estate in the event of incapacitation.  A common power of attorney established for clients is known as a “General Durable Power of Attorney.”

A General Durable Power of Attorney provides the greatest amount of power to an individual (an “Agent”) acting on behalf of another individual (a “Principal”) in matters related to the Principal’s assets. A Power of Attorney is a document that grants an individual (an “Agent”) the right to act on behalf of another individual (a “Principal”). A Power of Attorney can be “Special”, which limits the rights of the Agent to specific situation or period; or the Power of Attorney can be “General”, which allows the Agent the right to act on behalf of the Principal in a broader range of situations. A “Durable” Power of Attorney allows the Agent to act on behalf of the Principal even following the subsequent disability or incapacity of the Principal.

What Should I Consider When Choosing a Trustee?

When naming a trustee, one of the most important qualities would be integrity. Name someone you know will honestly and faithfully administer the trust account as you wish. It would be best to name someone with some understanding of the process and how to manage finances properly.

Which Properties May be Included in a Living Trust?

Any properties or assets being transferred to a Living Trust must be closely analyzed.  Real estate, business, interests, certain types of financial assets, etc. are often transferred to a Living Trust through its Trustees.  Life insurance often names a Living Trust as a beneficiary.  Retirement Accounts have special tax rules and often need the guidance of both your legal counsel and financial professionals in order to determine whether a Living Trust can or should be named as a beneficiary, or whether the beneficiaries of 401(k) accounts, IRAs, etc. should simply name individuals.    Our estate planning attorneys of Tiffany & Bosco, P.A. assist clients on this very important trust funding process, which is one of the key components of the establishment and purpose of a Living Trust.  If not done properly, a timely or costly probate procedure could result.

What Comprises an Estate?

• Cash
• Real estate
• Ownership in a business (full or partial)
• Life insurance death benefits
• Personal property
• Securities
• IRSs and other retirement plans

What Does a Good Estate Plan Consist of?

A good estate plan will:

• Protect privacy
• Preserve the value of assets
• Lower taxes and other administrative costs
• Ensure your intentions towards beneficiaries are met
• Protect you and your beneficiaries if incapacitated