Wills & Trusts

Remember the End Purpose For Having a Trust

Depending upon the purpose you wish to accomplish, you can decide which trust instrument is best to serve this need. For trusts which involve the care of a child or children, or other family members who cannot for one reason or another care for themselves, your most important purpose is to create a trust instrument with the most possible flexibility which will enable you to care for the person in the best manner possible, all while remembering that circumstances and values change over a number of years. Also, these types of trust might be in existence for years and years and great care must be taken to anticipate changes likely in state laws and court cases so that the trust purpose will not be thwarted.

For trusts which are primarily to serve tax purposes or to keep money flowing in the family, the primary purpose requires that you understand complicated income and gift and estate tax laws. Most important, if you decide to explore the creation of this type of trust, you should have at least one expert, an attorney, prepare this document for you and expect to make changes in the trust document and maybe even in the creation of newer trusts, which coincide with the changes made in the Tax Code. These trusts are really beyond the scope of this discussion.

For trusts which are created primarily to serve the purpose of passing property to your heirs while avoiding probate, you should be most concerned about how you intend to avoid probate. As we have discussed in the section on Wills, if you prepare a trust improperly, or there is a defect in the execution of the trust, or property is not properly transferred into the trust, you may end up in probate anyway.

Here is an example to illustrate. Suppose that after the death of your wife, you created a revocable living trust, and on the date it was signed you transferred $100 to the trust and opened a bank account for this purpose in the name of the trust. Now suppose that you really created the trust to prepare to give your assets to your surviving two sons and one daughter, but you did not want your third son to have any property because of his egregious treatment of you years earlier.

Your estate consists of a $450,000 house, in which you live, and two other vacation homes worth $100,000 each. You also have cash, stocks and Certificates of Deposit totaling $90,000. After the trust was in existence for two weeks, you called the bank and transferred the Certificates of Deposit into the Trust. You also called your stockbroker to change the name of the stocks into the Trust but he never returned your call. You got busy and did not follow-up. Also, since you prepared your trust yourself, you were having a difficult time finding a lawyer who would prepare the title to your house changing it from your name to the name of the trust.

After a year, this same situation remained unchanged. One night a car hit your car from behind and caused your car to roll over several times. You suffered massive brain injuries and remained in a coma in the hospital until your death several weeks later. Realizing that your family would likely pursue a lawsuit on your behalf for the wrongful death caused by the other driver, we will assume that it is being handled by another lawyer who is an expert in that field. [Realistically, a probate proceeding might have to be opened under this situation by the heirs of the person killed, but we will not discuss this issue here.]

Let's look at the distribution of the assets in your estate [not including the proceeds from any wrongful death or survivor lawsuit, which is discussed in the injuries section]. First the $100 plus the 2% interest earned on this amount would be distributed in accordance with the terms of the trust. The Certificates of Deposit would also be distributed as stated in the trust.

However, what happens to the stocks and the most valuable part of the estate the homes and vacation homes? Since they were never transferred to the trust, these assets must be probated and be distributed through the lengthy process of the probate court. Worse, exactly what you did not want to happen does have to happen. That is, unless you made a will, your third son will share in the distribution of the assets which were never formerly transferred to the trust.

The fact that you specified for the third son receiving nothing in the trust, and the fact that you may have even stated this purpose in your trust instrument means little to the probate court. Indeed, by failing to conform to the strict requirements of your state laws, you inadvertently created the situation you sought to avoid - Probate Court and an unintended beneficiary.

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