Part I explored what a trust is. Part II explored who needs a trust. In Part III, we’re exploring common misconceptions about trusts. These misconceptions center around three areas: who needs trusts, what can be accomplished with trusts, and how trusts operate.
1. Misconceptions about who needs trusts.
Trusts are primarily for high net worth individuals.
ACTUALLY: Many purposes for which trusts are created are unrelated to net worth.
My neighbor has a trust so I need a trust.
ACTUALLY: Trusts are not one size fits all. They are tailored to an individual’s needs so a trust may be right for your neighbor and may be wrong for you.
I have a will so I don’t need a trust.
ACTUALLY: Some trusts are created for purposes other than disposition of property at death. A trust, in your will or in addition to your will, may be perfectly appropriate based on your circumstances.
I need a trust in the event I go in a nursing home one day (or my parents need a trust because they may need to go in a nursing home one day).
ACTUALLY: You may (they may), but it’s a special type of trust. An inter vivos trust is not a Medicaid planning tool.
2. Misconceptions about what can be accomplished with trusts.
I can protect my assets from creditors by creating a trust. ACTUALLY: Self settled trusts are not asset protection tools. They are subject to creditor claims in Texas.
I can avoid marital property rules with a trust. ACTUALLY: Property conveyed to a trust retains its characterization as separate property or community property.
I can avoid probate by creating a trust. ACTUALLY: Maybe, however:
- People with trusts may end up in probate if the trust was not fully funded.
- Avoiding probate may not be a goal worth pursuing.
- There may be simpler ways to avoid probate.
3. Misconceptions about how trusts operate:
Trusts mean a loss of control. ACTUALLY: This may be true if a third party is a trustee, but a self trusteed inter vivos trust results in no loss of control. Additionally, certain trusts for spouses and children can be trusteed by such spouses and children.
After I set up a trust, my work is done. ACTUALLY: Your trust must still be funded. This means making sure titles to any titled assets are in the name of the trust, that accounts are in the name of the trust, and that as assets change, the new assets are titled appropriately. An inter vivos trust will require maintenance as to the titling of assets. Other types of trusts may require their own income tax returns and other maintenance.
If I have an inter vivos trust instead of a will, there won’t be anything to take care of when I die. ACTUALLY: Though no probate proceeding may be necessary, a Trustee must still perform many of the same administrative tasks as an Executor of a will admitted to probate, such as:
- Determine assets and their values.
- Pay Decedent’s bills and ongoing administration expenses.
- File income tax returns and any transfer tax returns.
- Distribute property to intended beneficiaries.
While trusts can be perplexing conceptually, I hope this three part series has helped you more fully understand what they are (insert link to part I), who needs them (insert link to part II), and some of the common misconceptions surrounding them.