Most of my clients tell me they know they need a Trust, but they don’t know what kind and they don’t really know what a Trust can do.
Trusts are similar to a registered business. They can hold legal rights separate from any individual. Trusts can own land, personal property, or even a business. Trusts can even own or control other Trusts. One way that Trusts differ from businesses is that Trusts are not normally registered with the state like a corporation or LLC. Instead, Trusts generally can operate outside of public view.
The exception to this rule is when a Trust is registered as the owner of property. This is most common when someone deeds their home to their Trust. In that case, anyone can review the county recorder’s records to see the name of the Trust and the names of the current Trustees of the Trust.
REVOCABLE TRUSTS
Trusts can be created for many purposes. Some Trusts are created to benefit the creator of the Trust. Others are designed to benefit someone else. Some Trusts can only be amended or revoked by all of the creators signing the amendment together.
The purpose of your Trust will lead us to determine which type of Trust you may need. A popular purpose is to pass on property outside of court to your heirs. A Will is insufficient to pass real estate to heirs without the heirs first going before a judge to request authority for the transfer. A Trust can hold that authority and then pass the authority on after you die to your successor trustees, without ever involving a court proceeding. Your successor trustees can then sign and record a deed giving the property to your heirs. This avoids probate, so this is the main reason most of my clients choose to create a Trust.
TAX AVOIDANCE
Another purpose of some Trusts is to reduce or avoid paying taxes. This is one purpose that is fraught with risks. The IRS and State legislatures are constantly on the lookout for loopholes that allow the average citizen to avoid taxes. Don’t assume that you can create a Trust to avoid taxes and then ignore the Trust for several years. Without the help of experts that monitor tax laws and advise you how to avoid them, you will quickly end up crossing the IRS and losing any benefit you thought the Trust had created. Using a Trust for these purposes can be expensive as those experts will often charge large sums to help you manage your estate.
A cheaper and less risky path is to create an estate plan that includes a Trust, but also distributes excess funds and property using time tested channels that the IRS already has approved. The IRS currently isn’t looking for estates that pass on less than 12.92 million dollars. The current tax code gives an exemption of that amount. For estates significantly larger, the tax is around 40%.
For this reason, some families will choose not to pass on their excess funds to their heirs. Instead the funds and property are kept perpetually in a Trust that allows heirs to have access to the properties, but never to own them. Imagine a large estate with mansions, stables and hunting grounds. Everything is owned by the Trust, but can be used by the Trustor’s descendants for free. Distributions of cash and other benefits are then limited by the Trust to match the requirements of the Tax code. In Utah, a Trust can last for up to 1,000 years.
IRREVOCABLE TRUSTS
Some will use Trusts to limit their liability in the case of a lawsuit. This is not as simple as it sounds, and many have tried to use a Trust for this purpose and failed. To truly limit liability, you can place property in an Irrevocable Trust. When you do, you have permanently given up ownership and control of the property. I encourage my clients not to place their residence in an Irrevocable Trust. Most of my clients need to be able to refinance and sell their home and have access to the equity for their own benefit at any time. An Irrevocable Trust does not allow this. Most people prefer to remain in control of all of their property, making an Irrevocable Trust a bad idea.
To succeed in using an Irrevocable Trust to avoid having an asset taken in a lawsuit, you will need to show that you have truly given up ownership and control of that asset. Some will only pretend to do so, giving the control and ownership to someone they can control themselves. There is a real risk of a court finding that the requirements of an Irrevocable Trust were not met, wasting your efforts and putting your property at risk.
Normally, Irrevocable Trusts are used when a client has so much property they can’t use it all for themselves, so they put some property in an Irrevocable Trust with the intent that the value will continue to increase before it is finally passed on to heirs during your lifetime or after. That property would be out of reach or creditors in a lawsuit. If you intend to do this, keep in mind that courts can reverse any gift made in the past three years to avoid paying creditors. This type of gift is normally made well in advance of a lawsuit as a mere precaution. Once something happens to trigger a lawsuit, you will be too late to gift away your property.
ASSET PROTECTION TRUST
Utah state law offers a unique “Asset Protection Trust” you can create at any time to protect an asset. This particular Trust won’t get reversed, but the rules are specific and must be followed. If you own something you feel is irreplaceable, you can place that item in the Asset Protection Trust. Creditors will be unable to access that asset to pay your debts, as long as you have other assets and cash of equal value that can be given to your creditors. This type of Trust is often misunderstood and makes some think that they can avoid paying creditors entirely. Not true. The only benefit to this Trust is that it protects a specific item you don’t want to lose while you use other assets to pay your debts in full.
SPECIAL NEEDS TRUSTS
When someone is disabled and receiving benefits, you may not want to give them assets that will either disqualify them from receiving those benefits, or have the government take those assets to pay off benefits paid previously. The answer to these challenges is to create a Special Needs Trust for the benefit of the disabled person. The Special Needs Trust can still be used to pay for expenses of the disabled person, but it is never considered their own money. This person can then continue to receive federal benefits without interruption. If the Special Needs Trust is created by someone other than the disabled person, (called a third party Trust) then after the death of the disabled person, the funds will return to the estate of the creator of the Trust. If a Special Needs Trust is created and/or funded by the disabled person, (called a first party Trust) then the funds remaining after death will first be used to pay the government.
Let’s talk Trusts! At Prigmore Law, I do free consultations. Please call today to discuss your options to find the right Trust for you!
THIS ARTICLE WILL DISCUSS GENERAL PRINCIPLES OF LAW. PLEASE DO NOT TAKEACTION BASED ON THIS ARTICLE ALONE. ONLY AN ATTORNEY CAN DISCUSS YOUR SPECIFIC SITUATION WITH YOU AND THEN HELP YOU DETERMINE YOUR BEST COURSE OF ACTION.
