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Using Trusts for Estate Planning

Now that you know what a trust is, let’s talk a little about how you can use them in estate planning. Stated differently, why would you want to use a trust instead of a will? First – let’s discuss an obscure secret – one that explains why other estate planning options are better than a will. The secret relates to when things happen. I know that sounds a little obscure, but hang in there with me and you’ll see the light!! When a will is prepared, assuming that the person whose will it is does not drop dead as soon as they put the pen down after signing, nothing happens. It’s a nice piece of paper and probably looks pretty impressive. But it doesn’t do anything. It probably goes into a drawer or filing cabinet and there it sits, collecting dust until that unfortunate day when the author dies and it is dusted off to see what should be done. The noteworthy element here is that the will is dormant, any relevant time limits, such as the running of any statutes of limitation do not run until the author dies. And, because it is a dormant document, if there are any problems in the wording of the will, or the manner in which the author elects to dispose of their property, those are not evident until….. you guessed it – until the author is dead. A little late to be fixing errors right?? A trust, if handled correctly is alive immediately. Property that would otherwise be addressed in a will is put into the trust. The trustee administers the property. The trust may use the property, rent it out, pay taxes on it, sell it, improve it…. All the things that any owner might do with their property. But the important thing is the trust is doing things – it’s not just sitting in the file cabinet collecting dust. What does that mean to you? Let’s look at claims that can be made by people you omit in a will, because those apply to a conveyance to a trust as well. Take the spousal elective share as an example. If you are married you cannot, in some states omit your spouse completely in a will. They are entitled to a share no matter what the language of your will. The same would apply to a trust. You technically cannot avoid that issue simply by putting things into a trust. But here’s the kicker….. there is a time limit – a statute of limitations – for a spouse to bring a claim to set aside any transfers that defeat their elective share. Once the specified time runs, the conveyance stands. It is too late for an omitted spouse to make a claim. When that time limit begins to run is the critical difference between a will and a trust. If you omit a spouse in a will, their time limit does not begin to run until the will is published… admitted to probate, which of course means the author is dead. With a trust, it runs from the moment the property is conveyed to the trust. Assume that the time limit is five years. If the author transfers property to a trust and lives at least five years more, the omitted spouse can no longer set aside the conveyance. In short, the author has accomplished with a trust what they never could have achieved with a will. The same holds true with respect to creditors. Once someone places property into a trust, and the trust is properly administered, it is beyond the reach of a subsequent creditor. So look at what a trust has done for our “author” in lieu of a will. First, if there is a legal spousal share and our “author” wants instead to give his entire estate to the Home for Retarded Pekinese dogs, they get to do so. Had they attempted to make this provision in a will, an omitted spouse could demand an elective share. Also, assume that the property is placed in the trust and a few years later our “author” falls upon hard times and has some debts. Upon his death, creditors can file claims against his estate which would diminish it. Once in a trust and the time for challenging the transfer to the trust has passed, the property is safe. Creditors can file all the claims they want against the “estate” but the property in the trust is untouchable. Not to shabby right??