What Are The Components That Constitute An Effective Trust?
There are three general components of an effective trust. The broadest component is the detailed instructions concerning the assets and how they should be handled. Next, the trust needs to contain a long-term plan with built-in contingency plans. For example, “I leave everything to my beloved daughter Anastasia; but if she does not then survive me, her share will go to my favorite church or charity. If that charity does not still exist, then it goes to my second favorite charity and so forth.”
Long-term planning requires that the trustor think ahead and provide a backup plan as to what should be done with their assets if their life has changed since the time that they wrote the plan. Next, an effective trust has to take into consideration issues such as divorce, potential creditors or predators in the beneficiary’s life, or a disabled beneficiary. The trustor who is creating the trust will need to advise the trustee as to how they would wish the assets to be distributed if their beneficiary is suffering from these difficulties that are common to people in order to protect the inheritance for that beneficiary to the greatest degree possible.
A good estate planning attorney will walk you through these issues and take note as to your expectations should that occur to your beneficiary.
Can I Protect My Heir’s Inheritance Through A Trust If They Get Divorced?
The trust absolutely can and should protect your heir’s inheritance. The benefit that you’re leaving behind for your child should remain in the name of the trust and under the control of the trustees, and the assets in that trust can and should be used for the benefit of the child but not delivered up in the name of the child. This holding of the assets in your trust for the benefit of your child means that the assets do not belong to the child, would not be subject to your child’s divorce, would not be subject to your child’s tax problems, and would not be subject to being lost if your child has a terrible car accident. Yes, you can and should protect your children when they are in marriages that cause you some concern.
Can Someone Have More Than One Trust?
Almost everyone should have at least two trusts. You should have a revocable trust, also known as a living trust, that handles your day-to-day bank account, perhaps owns your vehicle, maybe even your household goods and furnishings. On the other hand, you should also have an irrevocable trust that will own all of the assets that you wish to give the greatest protection. Perhaps you put your home in your irrevocable trust so that if you have a terrible car accident, any lawsuit judgment would not attach to your home. You might also put your investment account into the name of your irrevocable trust so that if you are incapacitated, you will not lose that investment account to nursing home care or to other creditors and predators who may become part of your life.
What Do You Advise Clients Who Are Nervous About Losing Control Of Their Assets To A Trust?
It is a common misconception that an irrevocable trust means you must give up all control. That’s not true except for inheritance tax planning. Outside of estate tax planning, you can maintain a great degree of control over your trust, and you’ll still have asset protection. You only have to give up that amount of control that you most wish to protect. For example, if you put your investment account into the name of your irrevocable trust, you may want to give up the right to withdraw the corpus, the basic investment of that trust, and yet you may wish to retain control to choose which child will receive it when you pass away.
You may also want to retain sufficient control that you can give a portion of this asset away to the charity or family member of your choice. Secondly, revocable trusts, also known as living trusts, allow you to retain 100% control: you can blow up the trust, give the assets to yourself, give them to your mom, spend them, whatever you want to do, but they offer no asset protection.
The downside of that is that all of these rights that you retain are also the rights that the creditors can take from you. So, to the degree you retain control, you have the risk of loss; to the degree that you’re willing to give up control, you have the ability to protect it, but you do not have to give up all control to gain some protection.
For more information on Components Of An Effective Trust, a free estate planning workshop is your next step. Get the information and legal answers you are seeking by calling (405) 880-8960 today.
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