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Trusts – Questions and Answers

Setting up a trust is an option you should consider when doing estate planning or if you want some of your resources to help a person, an organization or a cause you care about in Indiana. Trusts aren’t just for the wealthy, and they can be as simple or as complicated as you want them to be. Below are answers to many common questions.

What is a trust?

A trust is a financial arrangement you (the grantor) create allowing a third party (the trustee) to manage and spend assets to benefit a person, group of people, charity or charitable cause (the beneficiary or beneficiaries). Trusts can be set up in any number of ways and can specifically state exactly how and when you want the assets (or income from the assets) to pass to the beneficiaries.

What are some of the benefits of a trust?

You control your wealth.

  • You direct when and to whom distributions may be made.
  • You can specify that you will get access to assets during your lifetime and designate who is entitled to remaining assets after your death.

Trusts can be created and beneficiaries can receive income during your life. They can also be created on paper but not funded until after you pass away. Assets from your estate can be the basis (or res) of the trust. This offers some benefits over transferring assets through the probate process:

  • Trusts normally avoid probate, so your beneficiaries may gain access to these assets faster and without court fees.
  • Your will becomes a public record during the probate process, but a trust does not. If you value your privacy, a trust could prevent others from knowing who got how much after you pass away.
  • Depending on how it’s established, a trust may not be considered part of the taxable estate, so fewer taxes may be due upon your death.

Instead of providing assets to those who may not be able to manage money well, such as a child or an adult with a disability, the trustee can manage the money to distribute assets or income to pay bills, meet certain expenses or when the person reaches a certain age or a particular event in their life occurs (graduation from college, marriage, birth of a child).

What kinds of trusts are there?

There are many kinds of trusts that can be set up to limit tax exposure, fund charities and provide support to family members, but they generally fall into two categories:

  • Revocable or living trust: It allows you to modify or end the trust. It can help transfer assets outside of probate after your death and allow you to retain control of the assets during your life. The trust can be dissolved at any time if your circumstances or desires change. These trusts often become irrevocable (see below) when the grantor dies. You can be the trustee (or co-trustee with another person), maintain control over the trust and make provisions for a successor trustee if you become incapacitated or die. These trusts can help avoid the probate process when assets are transferred, but can be subject to estate taxes and will be treated as one of your assets during your lifetime.
  • Irrevocable trust: This type of trust can’t be changed by the grantor after it’s created. While this loss of control is a negative factor, the benefits are that it generally transfers your assets out of your estate and potentially out of the reach of estate taxes and probate. If your goal is to reduce your estate tax liability, this is an option you should consider. It may also shelter your assets from legal judgments against you and can be part of Medicaid planning.

What’s the role of the trustee?

The trustee manages the assets and distributes them, or income from them, according to the trust and applicable laws. The trustee is considered a fiduciary so must live up to high standards, including:

  • Fully following instructions in the trust
  • Not treating trust assets or income as his or her own
  • Maintaining records to establish that trust assets are properly managed and spent, releasing that information to beneficiaries when requested and paying taxes as required.
A trustee who mismanages or misuses trust funds could be sued by beneficiaries who have reason to believe the trustee isn’t living up to his or her fiduciary obligations.

Whether you’re in Indiana or Kentucky and planning for your own future or the future of a loved one, consider allowing McNeely Stephenson to help you by answering your questions about trusts or by creating them to meet your wants and needs. Contact us today to start finding solutions: complete our online form, or call us at (812) 725-8224.