Trusts: Are They as Necessary to Estate Planning as Many Claim?

When many Nashville, Brentwood and Franklin area residents find themselves making decisions concerning retirement and estate planning, the possibility of creating a trust is often one of the options presented to them. However, banks and financial planners—many of whom are located outside of Tennessee—tend to breathlessly hype trusts as “wonderful”, “simple” and “advantageous” as a means to tout their own services, rather than to educate potential clients about the financial decisions that they face. As a result, many local residents may have certain misconceptions about what a trust is, and why creating a trust can be a good idea.

First of all, there are two types of trusts:

• Irrevocable trusts, in which the individual creating the trust (the “settlor”) relinquishes all rights of ownership to assets placed in the trust, as well as the right to modify the trust. For example, a special needs trust is a type of irrevocable trust in which trust assets are used to specifically benefit a particular individual, usually a close relative of the settler, who has a disability, particularly when the beneficiary lacks the capacity to manage his or her own affairs. By transferring assets, not directly to the beneficiary, but into the trust, proceeds from the trust can be used to assist the beneficiary, who still remains eligible for Medicaid, Social Security, and other government benefits.

• Revocable trusts, on the other hand, can be dissolved or modified by the settlor at any time, only becoming irrevocable upon his or her death or incompetency. Generally, the settlor transfers ownership of assets from his or her name to the trust’s name, yet maintain control over the asset by appointing themselves trustee. This is the “living trust” often touted as a means to avoid probate; when the settlor dies, a successor trustee steps in to distribute trust assets to designated family members in much the same manner as an inheritance—but without the need for either a will or the probate process.

It should be noted that in Tennessee, the probate process isn’t nearly as drawn out and expensive as it can be in other states—and as a result, not nearly as horrific as it is often portrayed. However, probate avoidance is just one of several benefits that living trusts provide:

• Taxes—Tax savings are another often-most cited benefit of living trusts, although one should take note of the fact that not all estates are subject to federal estate taxes, that a properly written will can also effectively save taxes, and that tax laws are always subject to change by legislators. All that said, however, living trusts enable a flexible and useful tax strategy, and an experienced Nashville estate planning attorney can tailor a trust to the specific needs and possible tax burdens each client faces.

• Privacy—Unlike the probate process, in which every action and event is considered a matter of public record, revocable trusts are private, and access to trust records is limited to the settlor and the trustee.

• Controlling the distribution of assets to certain beneficiaries—Besides enabling the creation of a financial arrangement such as the special needs trusts discussed above, trusts can also limit the distribution of an inheritance for other reasons. For example, a 50-year-old would likely handle the receipt of a sizable inheritance differently than a 20-year-old. The terms of a trust can not only defer such a large disbursement to an heir until he or she has reached a particular, but can also allow a trustee to distribute funds from the trust for a specific purpose, such as an heir’s education, rather than funding a foolish spending spree.

• Avoiding will contests—Because a will does not go into effect until after the creator of the will dies, it is fairly easy for a disgruntled family member to bring the probate process to a complete halt by contesting it on the grounds of incompetence, undue influence, or fraud, primarily because the deceased cannot dispute the claim. Contesting a trust is considerably more difficult.

At Middle Tennessee Family Law, our dedicated Nashville estate planning attorney believes that while the creation of a living trust can help many Tennessee residents with their estate planning needs, it is but one of several possible options, and we help each of our clients to make an educated decision which is best suited to their personal financial situation and estate planning needs. If you are interested in creating a trust, or just wish to learn more about all of your estate planning options, we urge you to contact us online for a free initial consultation. We are located in the Pilcher building in historic downtown Nashville, and we have evening and weekend appointments available.