7 Reasons Why Forming A Trust Is Worth The Investment

While a will is perhaps the most important document to have in place for an estate plan, another key estate planning tool is a trust. This legal mechanism provides an individual who creates the trust (the settlor) and their loved ones with several unique benefits, including clear asset management per the settlor’s wishes during their lifetime and following their death. Learn seven reasons why forming a trust is worth the investment, and discover how an experienced Gilbert estate planning lawyer might assist people with their estate plans; call Harrison Law, PLLC today at (480) 320-2310 to arrange a consultation.

What Is a Trust?

Trusts are fiduciary agreements, typically forming part of an individual’s estate plan, which enable another party, known as the trustee, to hold a settlor’s assets for the benefit of those who stand to gain from the trust’s assets, referred to as the beneficiaries. When establishing the trust, the settlor outlines the trust’s terms, which stipulate when and how the assets transfer to the beneficiaries. Per the Internal Revenue Service (IRS), state laws govern trusts, meaning the rules concerning these legal instruments vary depending on location.

Settlors can establish various kinds of trusts, and they can place virtually any owned asset within them, such as cash, real estate, and investments. The two main types are irrevocable and revocable trusts, as explained below.

Irrevocable Trusts

Irrevocable trusts are unalterable once established and the settlor transfers the assets. Because the settlor loses control over the management of these assets and the trust, the assets placed within the trust no longer form part of the settlor’s estate, possibly allowing the assets to avoid probate and estate taxes.

Revocable Trusts

Settlors can change or dissolve revocable trusts at any point during their lifetime, providing flexibility. While settlors retain control of the trust, the assets within these mechanisms continue to be part of the settlor’s taxable estate; as a result, they do not obtain creditor protection or help to minimize estate taxes. Upon the death of the settlor, revocable trusts become irrevocable, and the assets within these arrangements may avoid probate.

Understanding Trustees

A trustee must be at least 18 years old. Trustees can be virtually anyone, including friends, family members, professionals such as accountants or attorneys, or entities. Trusts can have either a single trustee or several trustees.

Regardless of who becomes a trustee, the settlor typically makes the trustee aware of the trust’s rules and the trustee’s legal obligations. Effective trustees always manage the trust and its assets in the beneficiaries’ interests.

Why Should I Put My Investments in a Trust?

Placing a house and other assets in a trust offers numerous benefits. Below is an explanation of these factors.

Avoiding Probate

When someone dies with a will in place, the estate undergoes the probate process, which is typically a costly and lengthy procedure. However, when an individual transfers their assets into a trust during their lifetime, these assets do not usually go through this process, simplifying the asset distribution process and avoiding probate costs and time delays. Worth noting is that if the settlor establishes the trust via their will (upon the settlor’s death), the assets within the trust undergo probate before the creation of the trust.

Gain a more detailed understanding of why forming a trust is a worthwhile investment, and discern how a seasoned Arizona estate planning lawyer can help individuals adopt sound estate planning practices. Reach out to Harrison Law, PLLC today to speak to our legal team.

Obtaining Privacy

Wills are public documents, which means any party can view how the deceased individual wants to transfer their assets. By contrast, trusts are private arrangements; only the decedent’s trustee and attorney have access to the agreement’s terms, offering a greater level of privacy compared to wills. Such privacy can be useful to those who want to avoid giving certain relatives access to their financial affairs.

Gaining Asset Protection

Irrevocable trusts have the potential to protect assets from legal action, creditors, or other claims since they are legally separate from the property owner. However, it is possible for other parties to successfully challenge this separation.

Reduce or Avoid Taxes

Irrevocable trusts carry transfer tax advantages due to transferring assets outside of the settlor’s taxable estate. Anything transferred to these trusts typically incur gift taxes during the settlor’s lifetime, although there is an annual exemption whereby the settlor can avoid paying gift taxes on assets below a particular value. In addition, provided the trust meets certain conditions, the assets within the trust and any appreciation of these assets may avoid estate taxes following the settlor’s death.

More Control Over Assets

Settlors can choose to transfer their assets into a trust and then appoint themselves as the trustee, offering greater control over asset distribution. For instance, they could set age restrictions before the transfer of the assets or establish milestones for the beneficiary to reach before they obtain ownership of the property.

Less Burden for Beneficiaries

Placing assets in a trust removes the psychological and financial burden from the beneficiaries. This can help reduce stress for a decedent’s loved ones.

Help During Disability or Illness

Wills take effect upon an individual’s passing, whereas revocable trusts set up during a person’s lifetime can assist that individual’s family if they fall ill or can no longer manage their assets. In this scenario, the trustee can pay the incapacitated person’s bills, make asset distributions, and submit tax returns on the incapacitated individual’s behalf. Establishing this type of trust helps prevent family members from making these decisions during a difficult period.

Reasons for Not Forming a Trust

Before seeking to establish a trust, the recommended approach is to make the settlor and nominated trustee aware of a trust’s drawbacks so they understand what this legal arrangement entails. These are as follows:

• Depending on the trust’s complexity and administrative costs, it can cost several thousand dollars to establish a trust.
• Managing a trust involves fulfilling time-consuming and complex responsibilities that can last for many years.
• Trustees who do not manage the trust in the beneficiaries’ interest could face legal consequences.
• Trusts can occasionally result in greater tax burdens; for instance, a trust may potentially incur more income tax than individual taxpayers.
• Effective trust management necessitates prudent record-keeping and an understanding of the legal framework governing these mechanisms.

Contact an Arizona Estate Planning Attorney To Learn More

Setting up a trust enables people to formulate a plan for taking care of their loved ones when they pass away or become incapacitated. Having a trust simplifies the asset distribution process and enables settlors to establish a long-term financial legacy.  Learn additional reasons for forming a trust, and find out how the experienced Arizona legal team at Harrison Law, PLLC may aid individuals with developing effective estate plans. Speak to a knowledgeable Arizona estate planning attorney by calling (480) 320-2310.

© 2024 Matthew W. Harrison and Harrison Law, PLLC All Rights Reserved

This website and article have been prepared by Harrison Law, PLLC for informational purposes only and does not, and is not intended to, constitute legal or financial advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.