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Estate Planning

Trusts

A trust is a contract between two entities, the grantor (or truster or settlor) and the trustee for the benefit of a third entity, the beneficiaries. The grantor determines the terms of the trust and agrees to fund the trust (contribute property). The trustee agrees to hold, administer, and distribute the trust property in keeping with the terms of the trust agreement. The trustee holds legal title to the trust property for the benefit of the beneficiaries who hold equitable title. A trustee cannot use trust property for his personal benefit.

Living or testamentary?

A trust can be current (living) or testamentary (created during the probate of a will). I recommend using a living trust; otherwise, you are dependent on someone else to create and fund the trust and all the assets must go through probate (subject to fees).

Why would I want a trust?

A trust provides greater control over the timing and condition of distribution of assets than a will. For example, do you want your 19-year old to inherit $100,000 or would you prefer that a trustee manage the money for your son until he graduates from college (timing). Maybe you would prefer to give your son half of the money when he reached the age of 25 years and the other half at 35. Maybe you would like to provide your daughter with an annual supplement to her salary if she became a teacher (condition).

If I have a trust do I need a will?

Your primary distribution plan can be in either a will or a trust. A trust directs the distribution of assets in the trust, e.g. if you own your house individually to qualify for the homestead exemption, the house is not a trust asset and would be distributed in your probate estate. It is always a good idea to have a will even if all it does is "pour-over" all the probate assets into the trust.

Revocable or irrevocable?

Irrevocable trusts are generally used for tax planning. The revocable trust is generally used as a distribution plan.

Do I have to file an income tax return for my revocable, living trust?

If the trust is revocable, that means you can put assets in, take them out, amend the trust or revoke the trust. Therefore, contributing assets to the trust is not considered a completed gift until the grantor loses capacity. Therefore, the revocable trust is not a separate legal entity and is not required to file an income tax return.

How long can a trust last?

The length of a trust is determined by the "rule against perpetuities." In Alabama, a trust may last for a "life in being" plus 21 years, For example, if a grantor has three children and 5 grandchildren the trust must terminate 21 years after after the last of them dies. However, if the trust holds real property and the trustee has the power to buy and sell that property, the trust may run for 360 years.

Will a trust provide creditor protection?

A revocable trust does not provide creditor protection to the grantor/settlor. An irrevocable trust (in Alabama) allows a creditor of the grantor to reach the maximum amount that the trustee could have paid to the grantor as a beneficiary. Therefore, an irrevocable trust for the benefit of someone other than the grantor does provide creditor protection as long as the trust includes a "spendthrift" provision.