When you sit down to create your comprehensive estate plan your North Dakota estate planning attorney may recommend that you include a trust (or several trusts) in your estate plan. Specifically, it may be recommended that you establish a living trust as part of your overall estate plan. If you have never created a trust before you likely have a number of questions about trusts and about including one in your estate plan. Only your North Dakota estate planning attorney can provide you with individualized advice and guidance about your estate plan; however, it may help you to gain a better understanding of some of the many benefits of a living trust.
What Is a Trust?
A trust is a relationship whereby property is held by one party for the benefit of another. A trust is created by a Settlor (also referred to as a “Maker” or “Grantor”), who transfers property to a Trustee. The Trustee holds that property for the trust’s beneficiaries. The beneficiaries of a trust may be current and/or future.
Testamentary vs. Living Trusts
All trusts fall into one of two categories – testamentary or inter vivos, more commonly referred to as “living trusts.” A testamentary trust is a trust that does not activate until the death of the Settlor. A living trust, on the other hand, becomes active as soon as all formalities of creation are met. Living trusts are then further divided into revocable and irrevocable living trusts. A revocable trust is one that can be modified or changed at any time and for any reason by the Settlor whereas an irrevocable trust cannot be modified or revoked by the Settlor for any reason once the trust takes effect.
Benefits of a Living Trust
A living trust offers a number of benefits, both to the Settlor and to the beneficiaries of the trust. Among the most popular benefits of a living trust are:
- Control — Not all that long ago trusts were used almost exclusively by the wealthy because they provided a way to pass down the family wealth without incurring a large tax burden and they allowed the Settlor to maintain a certain degree of control over the assets held in the trust through the trust terms. Although the tax loopholes that were once used to avoid taxation on the transfer of wealth are no longer available, one of the most popular benefits of a trust remains the ability to decide how the trust assets are used and/or distributed. As the Settlor, you create the trust terms. Unless a term is illegal or unconscionable, the Trustee of the trust must follow the term when administering the trust.
- Flexibility – living trusts are extremely flexible. Although there are a number of specialty trusts that you might choose you create, such as a Special Needs Trust or a Medicaid Trust, you can also create a totally unique trust using your own trust terms. This allows you to reach your individual estate planning goals much more easily.
- Ability to Change – if you create a revocable living trust, you will have the ability to make changes to the trust at any time and for any reason. This can be an invaluable benefit of you need to add or delete beneficiaries or change the way in which you want the trust assets distributed.
- Asset protection – if you create an irrevocable living trust, one of the most important benefits is the ability to protect assets from creditors and other threats to the assets. Once you transfer an asset into an irrevocable living trust it becomes trust property, meaning it is no longer part of your estate. As such, the asset is not accessible by creditors of your estate. The assets are also ultimately protected from a spendthrift beneficiary through the use of the trust terms you create. A Medicaid trust is a good example of an asset protection trust. A Medicaid trust is an irrevocable trust that is created to take ownership of assets that would be considered countable resources when you apply for Medicaid. Because the trust is an irrevocable trust, once you transfer an asset into the trust it is no longer part of your estate and, therefore, no longer a countable resource. When created early enough, and drafted properly, a Medicaid trust can protect considerable assets.
With all of these benefits, it is no surprise that it is common to see at least one livng trust in the average estate plan.
If you have additional questions about the benefits of a living trust in the State of North Dakota contact the experienced estate planning attorneys at German Law by calling 701-738-0060 to schedule an appointment.