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A trust is a legal arrangement that allows the person creating the trust (known as the Settlor, Trustor, or Grantor) to appoint someone (the Trustee) to manage and protect assets designated for the benefit of a third party or parties. The people who benefit from a trust are the “beneficiaries,” although a beneficiary can also be an entity (such as a church) or even the family pet.
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A living trust activates during the lifetime of the Settlor. A testamentary trust, on the other hand, does not become active until the death of the Settlor.
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The legal document used to administer a trust is referred to as a “trust agreement.” For a living trust, a trust agreement is drafted by the Settlor and assets are transferred into the trust. Once those formalities are accomplished, the trust becomes active. A testamentary trust is also administered using the terms of a trust agreement; however, the trust itself is created through a provision in the Settlor’s Last Will and Testament. As such, the trust does not become active until the death of the Settlor.
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A living trust can be revocable or irrevocable. An irrevocable trust cannot be modified or revoked by the Settlor. Because a Will can always be revoked, a testamentary trust can be revoked prior to it becoming active. Once the trust is activated by the death of the Settlor, however, the trust is irrevocable.
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Parents with minor children often choose to include a testamentary trust in their estate plan as a safety net in case both parents were to meet an untimely death while the children are still young. Having a testamentary trust in place ensures that the inheritance intended for the minor children is protected while the children are young, and the assets held by the trust available to provide financially for the children. The same trust can stagger distribution of the trust principal once the children reach adulthood to avoid handing young adults a lump sum inheritance. If the trust serves no other purpose, there is no reason to incur the expenses associated with administering a living trust, making a testamentary trust a good choice.
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One thing to consider when deciding which type of trust to create is whether the trust assets will be part of the probate of your estate. Assets held in a living trust avoid probate because the assets are owned by the trust, not by you, at the time of your death. Conversely, assets that will be transferred into a testamentary trust are still owned by you at the time of your death. As such, those assets do go through probate.
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As the Settlor of the trust, you can appoint anyone you want to be the Trustee of the trust. Having said that, take the time to think about the duties and responsibilities of a Trustee before appointing one. Ideally, your chosen Trustee should have a financial and/or legal background and should be capable of understanding and following the terms of the trust. Consider possible family conflicts before choosing a family member and consider who you trust to make decisions that are in the best interest of your children if they are the beneficiaries of the trust.
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Contact Us
If you have additional questions, contact an experienced Indianapolis, Indiana elder law attorney at Frank & Kraft. by calling (317) 684-1100 to schedule your appointment today.
