Will Substitutes

A will substitute (also called “nonprobate transfer”) is a method of transferring property outside of your will with the purpose of avoiding the probate process. These methods help to put your property in the hands of your beneficiaries faster than they would receive it through probate, and they offer a more diversified estate plan than you would have if you executed only a will. There are many types of will substitutes, and this section describes the most popular.

Trusts – In General

What is a trust, and what is its purpose?

A trust is a legal instrument where you name a person (“trustee”) to hold and manage property for the benefit of another (“beneficiary”). You then transfer property into the trust by changing its ownership so that it is owned in the name of the trustee instead of in your name. It is a versatile estate-planning tool and is a commonly-used alternative to a will for giving away your property, because it allows you to control the circumstances under which the beneficiaries receive the trust’s property. For example, you can set up a trust for your minor children and state that they are not to receive the property until they are age 30 (whereas under a general property guardianship they would receive it when they reached the age of majority). You can put your son’s inheritance in trust to protect it from the claims of his creditors or from his own irresponsibility with money. You can even place your property in trust and name yourself as beneficiary in the event you become unable to manage your own financial affairs.>

The trust cannot be used for an illegal purpose or one that is contrary to public policy.

I already have a will. Why should I create a trust?

A trust allows you to do many things that you can’t accomplish with a will. You can protect assets from creditors, possibly minimize the effects of estate taxes, or provide for the support and maintenance of beneficiaries over a period of time. For example, if you leave money to your child under your will, he will receive it when you die. But if you put the money in a trust and name your son as beneficiary, you can control the amount he receives on a regular basis and can prevent him from squandering away large sums of money by spreading the payments out over a period of time.

TIP: It is a good idea to have a will even if you decide to create a trust, because the will can accomplish things that cannot be done with a trust (e.g., naming a guardian or an executor). Also, if you die owning any property that was not transferred into a trust, then it can pass under the will (usually through a specific provision or under the residuary clause) and avoid any intestacy.

What types of trusts are there?

There are too many types to name here, but the most common are:

  • Testamentary: A testamentary trust is set up through your will and becomes effective on your death. Basically, you designate certain property in your will to be held in trust after your death. The trust can be revoked or modified while you are alive, but becomes irrevocable after your death. It passes through probate because it is created by your will.
  • Living: A living trust is created and is effective while you are alive, and may or may not be revoked or modified. It is usually not subject to probate.
  • Discretionary: A discretionary trust in one that gives the trustee power to decide how much and when to pay out to a beneficiary. The trust’s property is protected from the beneficiary’s creditors until the trustee decides to pay out any money, but then he must pay it directly to the beneficiary’s creditors.
  • Support: A support trust requires the trustee to disburse payments to (or on behalf of) the beneficiary as is necessary to provide for her support. The right to the payments cannot be assigned to others and is not subject to the beneficiary’s creditors.
  • Honorary: This is a trust that does not name a beneficiary and the trustee is “on her honor” to carry out his duties. It is usually established to provide for the care of a pet or plot of land.
  • Charitable: A charitable trust is in favor of a specific charity or group of unnamed beneficiaries. It must be created to accomplish a charitable purpose that benefits the public.
  • Q-Tip: This is a “Qualified Terminable Interest Property Trust,” and provides that the income from the trust is to be paid to your spouse during her life and then is to be distributed to the beneficiary when she dies. This type of trust delays paying estate taxes until your spouse dies.

Who should I name as trustee?

The creator of a living trust generally names himself as the only trustee so he can have complete control over its management. However, you can name anyone that you want as long as the person is competent. Be sure the person you select is someone that you trust with your personal affairs. Common designations are in favor of family members, though some people choose to hire a professional trustee, such as a bank (which usually charges a fee).

I forgot to name a trustee. Is my trust invalid?

No. If you forgot to name a trustee, or if the one that you named is unable or unwilling to serve, the court will appoint one for you and the trust remains valid.

I am named trustee of a trust. What do I need to do?

Your duty is to administer the trust in good faith and as a reasonably prudent person. You must act in the best interests of the beneficiaries and according to the directions set forth in the trust instrument. You are required to protect and preserve the trust’s assets, invest them in a manner that will increase their value, and make timely distributions to the beneficiaries. You may not mix the trust’s assets with your own, loan to or borrow money from the trust, or use your position as trustee in an improper manner.

TIP: The administration of a trust can be a time-consuming task. If you feel you need help, you can hire a professional (i.e., attorney or accountant) to perform some of the duties, but you cannot delegate the entire administration of the trust; you can delegate only some of the functions.

Does a named trustee have to serve?

No. The trustee can refuse the appointment as long as he hasn’t assumed any of the trustee’s duties. If the trustee accepts the appointment but subsequently decides that she no longer wants the responsibility, she can resign with the court’s approval.

When can a trustee be removed from office?

The court will remove a trustee from office whenever it feels that the trustee could jeopardize the trust. Common grounds for removal are commission of a serious breach of trust (e.g., he failed to properly invest the trust’s assets), inability to carry out his responsibilities (e.g., he is imprisoned), or he does not get along with the beneficiaries.

What issues should I consider when designating beneficiaries?

You can select as beneficiary any person or organization capable of taking title to property (charities and unborn individuals are acceptable beneficiaries; pets and unincorporated associations are not). The beneficiary does not have to identified by name, but must be capable of being identified when it is time to distribute the interest. For example, if you want to leave property in trust for your sister’s future children, you can do so even if you do not name them because it is possible to determine who the children are when it is time to distribute their interests.

Can I be a beneficiary of a trust that I create? Why would I bother doing that?

Yes. But you cannot be the only beneficiary and the only trustee. In that case, the title is said to “merge” and there really is no trust. One reason for placing your assets in trust for yourself is so you can appoint a co-trustee who will manage your affairs in the event you become sick and unable to do so yourself. In that event, the trustee can invest your assets, sell them if necessary, and make regular interest payments to you or on your behalf.

Can a beneficiary transfer his interest in the trust to another person?

Yes, unless the trust contains a “spendthrift clause.” A spendthrift clause prohibits the beneficiary from transferring his interest to another, and it also protects his interest from the claims of his creditors (unless the creditor is a dependent or the government). However, once the property is distributed to the beneficiary it loses its protection and the beneficiary can do whatever he wants with it (and his creditors can get it).

TIP: If the beneficiary of your trust is someone who is incapable of handling his financial affairs, is irresponsible with money, or has a lot of debt, a spendthrift clause is crucial. Without one, the trust property could disappear quickly.