This guide will help beginners in NYC understand what a trust is, how it differs from a will, and whether you should have one as part of your estate plan.
What is a trust?
A trust is a contract. It is a legal document that creates a relationship between the creator (hereinafter referred to as the “creator” or “grantor”) of the trust and a third party, known as the trustee, in order to give the trustee the power to hold, invest, and distribute the grantor’s property for the benefit of one or more beneficiaries. The beneficiary may be the grantor or any other individual or an entity like a not-for-profit organization.
There are many different types of trusts, several of which are defined below.
How does a trust differ from a will?
While both documents are used for estate planning purposes, such as providing for the creator’s family, trusts and wills differ in a number of ways.
Wills only become effective upon the testator’s death. (A testator is the maker of a will.) Trusts can take effect while the creator is still living.
In addition, property that is gifted through a will is distributed outright by the executor to the will’s beneficiaries upon the death of the testator. Trust property, however, is held and invested by a third party, known as the trustee, and distributed to the trust beneficiaries only at a specific time or times or upon the occurrence of a specific event.
In a Will, you state who you want to receive your property. With a trust, you control that property longer and can direct what happens to the property. If you want to continue to exert control during your lifetime and after your death, then you may want a Trust.
Who needs a trust?
Trusts serve many different purposes, including protecting one’s assets from creditors, minimizing tax liability upon death, ensuring that beneficiaries do not spend the full amount of their gifts at one time, maximizing charitable gifts, and providing for disabled individuals without disqualifying them from receiving government benefits.
In deciding whether a client needs a trust, an attorney considers a number of factors. First, the attorney considers the size of the client’s estate. For example, if the client’s estate is greater than the current federal and/or state estate tax exemption amount, the attorney might draft a trust that would help to reduce the client’s estate below the exemption amounts. Where the client’s estate is so large that no amount of planning would completely eliminate estate tax liability, the attorney might prepare a trust or series of trusts that serve to greatly reduce the client’s estate tax liability.
Some of the other factors include whether the client is married, whether the client’s spouse is a U.S. citizen, whether the client has children, the ages of the client’s children, whether the client owns real property, the client’s wishes regarding charitable giving, and whether the client wishes to provide for someone with a disability.
For more information on various types of trusts, please read below.
Do I need an attorney to draft a trust?
Yes. You should hire an attorney to draft your trust. Only a skilled attorney can help you create a trust that would afford you the full benefits of the trust. Trusts are often drafted to minimize taxes, protect assets from creditors, and preserve eligibility for government benefits. These various goals require knowledge of government benefits and tax law and a sophisticated understanding of what types of trusts and drafting techniques accomplish your intended goals.
What do attorneys generally charge to prepare a trust?
An attorney’s fees depend on several factors, including the attorney’s drafting experience, the location and size of the attorney’s firm, the reputation of the firm, the size of the client’s estate, the type of trust to be drafted, and the complexity of the client’s circumstances and goals. For example, it might cost more to draft a trust for A, whose estate is twenty million dollars greater than the estate tax exemption rate, than for B, whose estate is one million dollars greater than the estate tax exemption rate, as more work would be required to minimize A’s estate tax liability.
Many attorneys charge a flat rate for preparing a trust. New York attorneys commonly charge an individual between $2,000 and $5,000 for a revocable trust, which tends to be simpler than an irrevocable trust. (See below for an explanation of various types of trusts.) More complicated trusts, including various types of irrevocable trusts, can range in price between $2,500 and up to $10,000 or more, depending on the client’s goals and circumstances and the size of the client’s estate.
Some firms, usually mid-sized and large firms, charge a billable rate for drafting trusts. Their billable rates also tend to depend on the factors described above. Some of the bigger firms can even charge clients $1,500 plus per hour of billable work.
It is, therefore, important to ask an attorney about attorney’s fees before you meet with your attorney for your consultation.
What are the different types of trusts and when are do you need them?
There are two general types of trusts – revocable and irrevocable trusts.
Revocable Trusts: Revocable trusts become effective during the grantor’s lifetime and are revocable until the grantor’s death. Generally, during the lifetime of the grantor, the trustee holds, invests, and spends the property of the trust for the benefit of the grantor. Upon the death of the creator, the trust assets are generally either distributed outright to certain named beneficiaries or held in further trust for the beneficiaries. Revocable trusts become irrevocable upon the grantor’s death.
The revocable trust is generally created in order to avoid probate, which can be a very costly and time-consuming process. In addition, probate proceeding files are public records, and a revocable trust may help to preserve the privacy of the grantor. When an individual dies with a will, a probate proceeding must be commenced in order for a fiduciary to administer the decedent’s estate. However, if a person has a revocable trust, the trustee can administer the trust, both during the grantor’s life and after his death, without having to commence a court proceeding to do so. In order to ensure that no probate or administration proceeding is commenced, however, the grantor must transfer all of his assets into the trust, usually by retitling the assets.
Irrevocable Trusts: Irrevocable trusts are trusts that generally cannot be amended, revoked, or altered by the creator. (There is a whole set of laws governing the decanting of trusts, but this is a more complicated topic for another article.) While there are several types of irrevocable trusts that serve various purposes, one of the main purposes of creating an irrevocable trust is to minimize the estate tax liability that would be due upon the creator’s death.
Irrevocable trusts can be testamentary or inter vivos trusts. Testamentary irrevocable trusts are drafted into a will and can only become effective after the death of the person who drafted the will. Inter vivos irrevocable trusts become effective during the creator’s lifetime. An inter vivos trust cannot be written into a will.
Some of the most common types of irrevocable trusts are irrevocable life insurance trusts (also known as “ILITs”), Qualified Personal Residence Trusts (also known as “QPRTs”), Supplemental Needs Trusts and Special Needs Trusts (“SNTs”), Grantor Retained Annuity Trusts (“GRATs”), Charitable Remainder Trusts (“CRATs” and “CRUTs”), and Credit Shelter Trusts.
Irrevocable Life Insurance Trusts: An ILIT is a trust that is created mainly for the purpose of eliminating life insurance proceeds from an individual’s gross estate, thereby lowering his estate tax liability. After creating an ILIT, either the creator transfers the policy into the trust or the trust purchases the policy. The creator of the ILIT must name the ILIT as the beneficiary of the life insurance policy. Since the policy is now a trust asset, it is no longer an estate asset and will not be included in the trust creator’s gross estate for the purposes of calculating his estate tax. Please note, however, that in order for the policy to be removed from the trust creator’s gross estate, the creator of the trust cannot serve as trustee of the trust, name his estate as the beneficiary of the policy, or otherwise appear to own the policy.
Qualified Personal Residence Trusts: A QPRT is another trust that helps the creator of the trust reduce the size of his estate. When creating the QPRT, the creator transfers his primary residence, or a second home, to the QPRT, while retaining the right to live in the property for a certain period of time, rent-free. By transferring the property to the QPRT, the trust creator is removing the property from his estate, thereby lowering his potential estate tax liability. Once the term of the trust expires, the trust beneficiaries become the owners of the property. Note, however, that the creator must outlive the term of the trust. If the creator dies before the trust term expires, the trust will be included in the creator’s estate and the beneficiaries will not gain ownership of the property.
Supplemental Needs Trusts and Special Needs Trusts: Supplemental Needs Trusts and Special Needs Trusts are created for the benefit of a disabled individual. The purpose of the trust is to provide for a disabled beneficiary without disqualifying him from receiving government benefits such as Medicaid and Supplemental Security Income.
In order to preserve the beneficiary’s eligibility for government benefits, certain requirements must be satisfied. For example, in order for a supplemental needs trust to be valid, it must not give the beneficiary the power to “assign, encumber, direct, distribute, or authorize distributions from the trust.”
Charitable Remainder Trusts: Charitable Remainder Trusts are also created in order to reduce the size of the creator’s estate, thereby reducing potential estate tax liability. The creator of the trust names a non-charitable beneficiary to receive the income of the trust annually for the beneficiary’s life or for a fixed number of years (not to exceed 20 years) and a charitable beneficiary to receive the principal of the trust once the non-charitable beneficiary dies or the fixed period of time expires. The charitable beneficiary is known as a remainder beneficiary. Charitable Remainder Trusts remove the trust property from the creator’s estate.
A Charitable Remainder Trust can be a Charitable Remainder Annuity Trust (“CRAT”) or a Charitable Remainder Unitrust (“CRUT”). For CRATs, the annual amount paid out is based on the value of the trust property at the time it was contributed to the trust. For CRUTs, the annual amount paid out is based on the value of the property at the beginning of the year it was paid out.
Grantor Retained Annuity Trusts: Grantor Retained Annuity Trusts are created for the purpose of allowing the creator of the trust to gift income-producing property into the trust for a fixed number of years while continuing to receive the income from the property. Grantor Retained Annuity Trusts are another vehicle that are used to reduce the size of the creator’s estate, as the property of the trust is removed from the creator’s estate. However, in order for the full value of the property to be removed from the estate, the creator must survive the term of the trust.
Credit Shelter Trusts: Credit shelter trusts allow married couples to receive the maximum benefit of the estate tax exemption amount, thereby reducing estate tax liability.
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