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What Exactly is a Trust?

Legal websites are rampant with articles promoting the use of trusts and their value in avoiding the horrific, heinous probate process. In my experience as a trust officer, the overriding emotion that I noted when speaking with clients about trusts, and the entire estate planning process for that matter, was confusion. This is a valid response, as the process is complex. Even more vexing is the fact that in the final analysis, most estate plans come down to the individual circumstances of a particular client, their family, their wealth, etc. No “one size fits all”. What I did learn, however, was that the more the client understood, the better decisions they could make on behalf of their estate and their family.

To make better decisions, it’s important to know what a trust actually is. A “trust” is a fiduciary arrangement that allows a third-party, or “trustee”, to hold assets on behalf of a beneficiary or beneficiaries. The most common trust for estate planning purposes is a “revocable living trust”, which essentially is a written agreement that appoints a trustee to manage and administer the assets of the grantor, but which is totally under the control of the grantor, often the beneficial owner of the assets being managed. In fact, the grantor is often also the trustee of a revocable living trust, as well as the primary beneficiary.

Let’s bypass the technicalities of the mechanics of setting up the revocable living trust- the real issue is why is a revocable living trust a good idea? Is there any income tax benefit? None whatsoever? Does it protect your assets from creditors? Nope. So what does a revocable living trust do?

As driven home over and over in the online literature, they can, if properly drafted and funded, avoid the probate process. My experience here in New Mexico is that the probate process is not that heinous or horrific – it is, however, public. Probate filings are public record so anyone can go down to the courthouse and look at them. If this type of privacy is important to you, a properly drafted and funded revocable living trust is a private document that does not need to be filed with the court.

In my opinion, the most important and valuable benefit of a revocable living trust is that it provides for continuity of management of assets both during a grantor’s disability or death without the interruption. Provisions can address incompetency during lifetime and after the death of a grantor there is a successor trustee already designated in the trust document to assume responsibility and management of the assets without missing a beat. This successor trustee can be the spouse, an adult child, a trusted relative or friend, or a professional trust company, or a combination.

Since a properly funded revocable living trust has legal ownership to assets held rather than an incompetent or deceased individual, the successor trustee has immediate access to those assets rather than having to wait for a court proceeding to have availability. The importance of this is obvious as court proceedings can take a while and obligations do not cease at incompetency or death.

The revocable living trust is often the vehicle to set out how the grantor wants his or her assets distributed at death, taking the place of a Will. It is frequently a smoother process to fulfill the decedent’s wishes through the administration of a trust rather than through the probate process.

These are but a few of the benefits of a revocable living trust. There are disadvantages, too. Since title to assets must be transferred to the trust, there are some costs involved. It may also be a bit more cumbersome to transact business when assets are held in trust rather than an individual’s name, too.

It should be noted that there are other mechanisms to avoid probate, such as giving beneficiaries an interest in a limited liability company (or LLC). What’s best for you, depends on your particular circumstances and overall goals.

As stated earlier on, each individual situation must be evaluated to determine the need or benefit of using a revocable living trust. Many find it comforting to know that should something happen to them, there is a vehicle in place to take over immediately and privately. Please contact us to set up an appointment to discuss your estate planning needs.

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