As experienced New York estate planning lawyers, we know that there is no denying the importance of estate planning. Estate planning allows you to protect and manage your assets, provide for your loved ones, and ensure that your wishes are honored after death or incapacitation. A good estate plan not only addresses the transfer of wealth and property to your beneficiaries, but also helps minimize estate taxes, reduce the potential for familial disputes, and avoid the probate process. Trusts are a key tool in estate planning.
Trusts are versatile legal arrangements used in estate planning, where one party, known as the trustor or grantor, transfers property and/or assets to another party, the trustee, who holds and manages those assets for the benefit of one or more beneficiaries. This arrangement enables the trustor to control how their assets are managed, distributed, or invested—even after death or incapacitation.
Why Establish a Trust?
In most cases, individuals establish trusts to protect their assets from probate or from estate and gift taxes. But there are many other reasons that individuals will create a trust, including:
- Providing for loved ones: Assets can be protected and managed for minor children in the event of your death, or can provide a structured income for your surviving spouse after your death.
- Protecting assets: Assets can be protected for elderly loved ones, special needs family members, and even protecting you as you age.
- Control: Assets can be set aside for educational purposes while still controlling those assets. Also, conditions can be set for beneficiaries to receive assets.
- Avoiding probate: Assets can be passed on to beneficiaries quickly and easily without the lengthy and expensive probate process. Further, because probate is a matter of public record, a trust will protect privacy by letting assets move outside of probate.
- Decision making: Should you become incapacitated, a trustee can make important decisions on your behalf.
An important feature of trusts is that they are separate legal entities from the trustor. This is significant because it separates ownership and control of the assets, providing several benefits, such as protection from the trustor’s creditors, efficient management and distribution of assets to beneficiaries, and tax benefits (such as minimizing estate taxes by removing the assets from the trustor’s taxable estate).
Types of Trusts
There are many different types of trusts, depending on the need, types of assets, beneficiaries, and creator’s wishes. Trusts may be as nuanced as the individuals that they serve. Some common types of trusts include:
- Revocable trust: Revocable trusts are also known as living trusts, and allow the trustor to make changes, such as adding or removing assets or beneficiaries, or even dissolving the trust, during their lifetime. Since assets in a revocable trust do not pass through probate, they can save time and money, as well as maintain privacy.
- Irrevocable trust: Unlike a revocable trust, irrevocable trusts cannot be changed or terminated by the trustor without the consent of the trustee and beneficiaries. However, irrevocable trusts can provide certain tax advantages (such as avoiding estate tax) and asset protection that revocable trusts do not.
- Testamentary trust: Testamentary trusts are created through provisions in a will and become effective when the trustor dies. These trusts are subject to probate, and the trustor can change the terms any time before they die.
- Special needs trust: Special needs trusts are designed to provide for beneficiaries with disabilities without affecting their eligibility for government assistance programs, such as Medicaid or Social Security.
- Charitable trust: Charitable trusts are established to benefit a specific charity or the general public. These trusts can provide substantial tax benefits for the trustor and the trust itself.
The Fiduciary Duty of Trustees
The trustee owes a legal duty, known as a fiduciary duty, to the beneficiaries, meaning that the trustee must act in the best interest of the beneficiaries. These duties include:
- Duty of loyalty: The trustee must act in the best interests of the beneficiaries and avoid any conflicts of interest.
- Duty of care: The trustee must exercise a reasonable level of care and skill when managing the trust.
- Duty of impartiality: In circumstances where there are multiple beneficiaries, the trustee must treat them fairly and balance their interests when making decisions about the trust property.
- Duty to account: The trustee must keep accurate records of the trust’s financial transactions and provide periodic reports to the beneficiaries.
- Duty to inform and report: The trustee must keep the beneficiaries informed about the trust’s administration and respond to their requests for information.
These duties ensure that the trustee manages the trust assets responsible and ethically, as well as safeguard the trustor’s intentions and the beneficiaries’ rights.
Will vs. Trust? Which Is Better?
Trusts and wills are very different estate planning tools, but can be used in tandem. Anyone who has assets and loved ones can benefit from both.
One important difference is the timing of each vehicle. A trust may be funded and go into effect while the creator is still alive. A will, on the other hand, cannot go into effect until the creator’s death. A will sets out guardianship and funeral arrangements, while a trust sets out important financial guidelines. Although both serve to distribute assets to heirs, a trust can consider many different complex scenarios and can be fine-tuned in ways that a will cannot.
In some cases, if there is both a will and a trust with overlapping assets, the terms of the trust will typically supersede the will due to its separate nature.
Getting the Advice of an Experienced New York Estate Planning Lawyer
If you are considering creating a will, trust, or have questions about estate planning, you should get the advice of an experienced New York estate planning lawyer. Contact The Chamberlain Law Firm at (201) 273-9763 for a complimentary consultation to discuss your estate planning needs.