A trust is a legal document that provides instructions to a personal trustee on how to manage and distribute the estate. The most common form of trust in a Living Trust. This form of trust is established during a person’s lifetime and is usually revocable and amendable. A properly funded trust avoids probate and can provide instructions for management of the estate in the event of death or incapacitation. A Testamentary Trust is established as a part of will, but like a will it is only effective after death and must also be probated. Special kinds of trusts can provide for disabled children or grandchildren, called a Special Needs Trust. Also, certain Irrevocable Trusts can help protect assets from nursing home expenses.
One of the biggest estate planning mistakes that individuals make is failing to consider a trust. Many people falsely believe that a trust is only for the wealthy. However, they fail to realize that unlike a will, a trust will avoid the expensive and time consuming probate court. Once a trust is created, all assets (such as a home, other real estate, bank accounts, stocks, bonds, etc.) must be transferred into the name of the trust in order to avoid probate.
When you create a trust, you (Trustmaker) transfer your property into the name of the trust. To be managed by you or someone else that you choose (Trustee) for the benefit of yourself or someone else (Beneficiary). In a living trust you are generally the Trustmaker, Trustee and Beneficiary so that you remain in total control of your assets. However, at the time of your death or incapacity your Successor Trustee simply follows your instructions for further managing and distributing your estate.
In many cases, a trust is best for a family because it avoids the cost and hassle of the probate court. A few other benefits of a trust are:
- Flexibility: A trust allows for maximum control over assets. It can be used for general distributions for the transfer of assets or for specific distributions particular to the family such as setting aside money for the care of a disabled child or grandchild or providing money for the education of a child or grandchild.
- Preparation for the possibility of illness or incapacitation: A trust will provide a designated person to make medical decisions or handle assets during the period of incapacity.
- Privacy: By avoiding the probate court with a properly planned trust, not only will you save your family a lot of time and money, you will also keep the transfer of your assets and their worth a private manner.
- Protection from estate recovery: If a person was on Medicaid after September 30, 2007 their estate may be subject to estate recovery. This process is where the Michigan Department of Community Health tries to collect money paid by Medicaid for nursing home expenses. However, by avoiding probate court with a trust you can also avoid estate recovery.
- Security: Because a trust is made in advance and there is no court proceeding, it is less likely that a relative or creditor will file a claim against the estate.