This week I have covered how the disposition of assets is handled by using a will and through contract and the operation of law. Finally, I want to briefly mention trusts. Since there are many different kinds of trusts and can be relatively complex, this is only a brief overview of what they are and some of the benefits of trusts. If you are considering the use of a trust, you should certainly work with an attorney.
Definition of a Trust
According to Wikipedia:
In common law legal systems, a trust is an arrangement whereby money or property is owned and managed by one person (or persons, or organizations) for the benefit of another. A trust is created by a settlor, who entrusts some or all of his property to people of his choice (the trustees). The trustees are the legal owners of the trust property (or trust corpus), but they are obliged to hold the property for the benefit of one or more individuals or organizations (the beneficiary, a.k.a. cestui que use or cestui que trust), usually specified by the settlor. The trustees owe a fiduciary duty to the beneficiaries, who are the “beneficial” owners of the trust property.
Benefits of a Trust
There are many possible benefits from using a trust, and there are various types of trusts that can accomplish different goals, but some of the most common benefits are:
- Providing greater control over the management and disposition of assets prior to or after death.
- Providing additional personal and financial safeguards to you, your family, or beneficiaries.
- The ability to possibly postpone or eliminate the need to pay unnecessary taxes.
Types of Trusts
There are many different types of trusts that all have specific uses, but the two primary types of trusts are:
Testamentary Trust. These are created as a part of the will become effective upon death, just like a will. The most common use for this type of trust is to allow the decedent to transfer assets to the trust for management by the trustee, who is then responsible for managing the assets and distributing the assets to the beneficiaries according to the provisions of the trust. In most cases, the assets will go through the probate process before being transferred to the trust, so there may be some concerns with public records and possible estate taxes.
One of the benefits of this trust is that there is greater control over how the assets are distributed. For example, the trustor could delay the distribution of assets for the sake of providing for a child’s education. The structured disbursements can be beneficial when the trustor wishes the assets to be used during a certain time or for a specific purpose.
Living Trusts. While testamentary trusts become effective upon death, a living trust is created during the lifetime of the trustor. Assets owned by the trust are normally not subject to probate, which can be a significant benefit for those wishing for privacy.
It is also important to understand that living trusts can be either “revocable” or “irrevocable”. Revocable living trusts are used in situations where the trustor doesn’t want to lose total control over the trust. This will allow the trustor to change provisions of the trust, add or remove assets, or even have the option to make it irrevocable in the future. Irrevocable living trusts may not be altered or terminated once the agreement is signed. A few common advantages to this type of trust are that the income may not be taxable to the trustor, and trustor’s assets may not be subject to death taxes in the trustor’s estate. (Keep in mind, these benefits can be lost if the trust is not managed properly or if the trustor receives income from the trust)
Who Should Consider a Trust?
Unfortunately, I can’t answer that for you. With so many possibilities for wanting a trust, to varying laws from state to state, and the significant tax and legal ramifications, there simply isn’t a right or wrong answer. The best advice I can give is to learn more about what trusts can and can’t do, and examine your situation to see if there are any potential benefits in creating a trust. If this is something you are more interested in, you really need to seek the advice of an estate planning attorney.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
When talking about beneficiaries and contracts, yes, and that is typically the case because the asset is usually transfered to a new owner, who would then have to assign their own beneficiaries. Once the benefactor dies, the asset is either liquidated and given to the primary beneficiary (since it was liquidated, there are no more beneficiaries), or the asset remains intact, but now has a new owner, which would require the assignment of new beneficiaries.
I'm sure there may be some instances where the contingents may carry over, but with the types of accounts and assets I deal with, this is never the case.
Of course, I'm strictly referring to beneficiaries as it relates to contracts. Once you get into a trust, there are more intricate ways you can plan for contingencies. So the information you were reading was probably more related to establishing the chain of beneficiaries in a trust, which is more flexible.
I see; so the only contingency is death. When I stumbled onto the concept, I was thinking of a broader more intricate contingency, something like: "when I die, if [this] AND [that] happens within [this period of time], then [person A] is the beneficiary; otherwise [person B] is the beneficiary".
But back to the death contingency, you're saying that all contingencies expire/reset when the benefactor dies? In other words, each time the asset changes hands, prior beneficiary assignments are lost?
Contingent beneficiaries are common when there are children in the picture. For example, for the beneficiaries listed for a 401(k) plan, you are assign primary and contingent beneficiaries. Typically, someone would list the spouse as the sole primary beneficiary to receive 100%, and then list their child, or children as contingent.
The contingent is in force if the primary beneficiary is also deceased. This is a good thing to do since there are certainly possibilities where both parents could die together in an accident of some sort, so it could go directly to the children (or some other contingent beneficiary).
It is also worth noting that the use of contingent beneficiaries only works if the primary beneficiary is also dead. If the account holder dies, and the primary beneficiary receives the assets, it would be up to them to restate the beneficiaries as the contingents don't automatically get "promoted" to primary in that case.
Good question, and that is something I should have addressed when discussing contracts.
I wanted to thank you for the two estate planning topics this week. I am still absorbing them.
In the meanwhile, I ran across a reference elsewhere to "contingent beneficiaries". How would fit that approach into an estate plan?