If you are making or updating an estate plan, you may be wondering if a living trust should be a part of it. You may be under the impression that trusts are complicated or only for the wealthy. In reality, trusts offer a host of benefits, and you don’t have to be wealthy to realize those benefits. Not everyone needs a trust, but you may be surprised to learn what a trust can do for you and your family.
There are many types of trusts, all of which offer various benefits. The most popular is the revocable living trust, often just called a “living trust.” You have probably heard of these trusts, but you might not know exactly how they operate.
A living trust is a legal relationship in which property is held by one party (the trustee) for the benefit of another (the beneficiary). The person who creates the trust and funds it with assets is called the grantor.
The legal relationship is created by the trust document or trust instrument. The trust document establishes the terms of the trust. Trusts have some basic legal requirements, but the grantor can customize the trust’s provisions. For instance, the grantor can dictate how long the trust will continue after his or her death, and under what circumstances beneficiaries may receive distributions from the trust.
A trust can operate like this: Adele (grantor) creates a trust with a trust document that names Bea trustee and funds the trust with a bank account. Bea (trustee) manages the money in the account for the benefit of Carol, the beneficiary. In this scenario, the grantor, trustee, and beneficiary are all different people.
With a living trust, the grantor can also be the trustee and beneficiary during his or her lifetime. The grantor can use and enjoy property owned by the trust just as he or she could if those assets were in the grantor’s own name. The grantor can also revoke the trust at any time up until he or she dies or becomes legally incapacitated.
Assuming the trust remains in effect, when the grantor dies, a successor trustee, named in the trust document, immediately takes over management of trust assets for the benefit of beneficiaries named in the document.
Living trusts offer a number of benefits. Perhaps the best known is that assets in a trust do not need to go through probate. Because the successor trustee steps into the shoes of the grantor-trustee to manage trust assets, the delay associated with probate is eliminated: if the trust document provides for the successor trustee to distribute trust assets to beneficiaries, that can happen immediately, without court supervision.
However, the grantor may have specified in the trust document that assets continue to be held in trust for a while. It is common to do this when beneficiaries are minor children or young adults who are not able to manage assets on their own. A trust can ensure that assets are managed and used for their benefit until they are in a position to manage their inheritance. Without a trust, children would be entitled to receive their inheritance in full at the age of eighteen. The bottom line is that a trust offers more control over how and when assets are distributed than a will does.
Living trusts are not just useful for the protection of young beneficiaries; they can help the grantor as well. If you create a living trust and then become legally incapacitated (such as by dementia), your successor trustee can immediately begin managing the trust. Without a trust (or other measures, such as a power of attorney), your family might need to seek conservatorship over you to manage your assets. This can be costly and time-consuming, especially if family members disagree about who should serve as conservator.
As useful as a living trust is, there are some disadvantages. It usually costs more to create a trust than to make a will. And even if you have a trust, you probably still need a will. For example, you cannot name a guardian for minor children in a trust; you need a will for that. And you must fund the trust (actively place assets in it) for the trustee to have something to manage. It’s unlikely that the trust will contain all your assets; you will need a will to deal with the rest. (You may create a “pour-over” will, which funnels all of your assets that are not already in the trust into the trust after your death).
If you think you may need a trust, the first thing to do is to confer with an experienced Michigan estate planning attorney. Your attorney will listen to your goals and advise you regarding how best to achieve them. That may be a revocable living trust, another type of trust, or something else.
When you create a trust, your attorney will ensure that it complies with applicable Michigan law and is drafted to achieve the goals you intend. If you have questions about trusts in Michigan, we invite you to contact our law office to schedule a consultation.