A trust is a special type of legal arrangement, one that essentially creates a new entity made up of assets. It’s similar to how a corporation acts as its own business entity, separate from the people who own and operate it. Forming a trust allows someone to set aside their assets into a self-managing operation, in other words, with a trustee appointed to oversee its management.
Many attorneys recommend trusts during estate planning because they provide ample legal protections for your assets, along with a great deal of customizability. Because trusts have legal rights, similar to an individual or a corporation, it can be more difficult to reach the assets contained within compared to an estate managed solely by a will. Further, most trusts contain instructions for their management, allowing the trust creator to exert some control over how their assets are used or maintained over time, including after their death.
Trusts can be an effective tool for your estate planning goals, and they are the recommended solution for most people. There are also many different types of trust arrangements that must be considered. Consulting with our trust formation attorneys at New Mexico Financial & Family Law will enable you to create the best plan for your goals, helping you achieve your vision for the world you want to leave behind.
Schedule a confidential case review when you call our New Mexico estate planning attorneys at (505) 503-1637 or contact us online.
Every trust (with few exceptions) should have three primary parties:
A trustee acts as the representative and manager of the trust. They have a legal responsibility, referred to as a “fiduciary duty,” to manage the trust effectively, honor its terms, and protect it from outside interests that would stand in the way of its intended execution.
Duties of a trustee include:
Trustees are held accountable to these duties by the beneficiaries to the trust. If a trustee violates their fiduciary duties, beneficiaries will have legal standing to file a breach of fiduciary claim against the trustee.
For certain types of trusts, the grantor can designate themselves as the initial trustee. The terms of the trust can name a successor, or multiple successors, to take over the duties of trustee once the grantor passes on.
Naming yourself as trustee reduces the level of separation between you and the assets held in trust, however. That fact means that it may be easier for creditors and other individuals to access the contents of the trust. Appointing an outside trustee adds an extra layer of legal insulation while also demonstrating that the grantor has given up control of the assets, which may be required for certain types of arrangements. If the primary purpose of the trust is for estate planning, rather than asset protection, we generally recommend that the trust creator maintains sufficient control–including the ability to revoke the trust altogether.
A last will and testament is supposed to be a rather simple document, describing what portion of assets goes to what beneficiary. There is room for other instructions, including wishes for the handling of remains and a memorial service, but many of the provisions of a will are non-enforceable other than the actual distribution of property.
The problem with a simple will is the process of what happens to your assets after death is not very customizable. It is often said that in probate, the process is “divide, dump and dissipate.” If you want more nuance and specific instructions with what happens to your assets after you pass, a trust is likely the best option.
A trust, on the other hand, can have legally enforceable language that creates specific arrangements, allowing the grantor to distribute assets in more-complicated ways than a will allows.
Common examples of trust instructions include:
Trusts created during the lifetime of the grantor, otherwise known as a “living trust,” will be likely to pass assets outside of the probate process. In effect, the creation of the trust takes the applicable assets and removes them from the estate of the grantor. Since they are not part of the estate, they do not pass through probate.
Avoiding probate is often a goal for individuals and their families. Probate is not only stressful and time-consuming, but it also makes the contents of the estate and the named beneficiaries public knowledge. Forming a living trust allows the terms of the trust to be enacted sooner, without the delays that probate will introduce. Further, the additional cost of creating a trust is usually a bargain, as a probate court proceeding can costs tens of thousands of dollars if any significant issues arise.
There are a few main comparisons that should be understood when weighing your option for forming a trust:
There are other types of special trusts, as well, that we will not cover in this resource.
Many times, trusts are formed at the time of the grantor’s death, according to instructions contained within their will. These are called “testamentary trusts” because they are formed by the language of the decedent’s last will and testament.
A testamentary trust allows for some of the same arrangements as any other trust, but there are a few differences to be aware of:
By comparison, a trust created during the lifetime of the grantor can skip probate and allow its assets to remain protected against most outside claims. These are referred to as a “living trust” because they were formed during the lifetime of the grantor.
A revocable trust can be changed at any time by the grantor, including the option to remove a trustee for any reason.
Irrevocable trusts cannot be changed once they have been formed, meaning the grantor has no ability to stop a trustee or any other party if they suddenly disagree with the way the trust is being managed. Instead, a beneficiary must represent their interests through legal action.
An irrevocable trust can offer a few advantages compared to a revocable one, including possible estate tax reductions and the ability to completely shield assets from outside parties.
Discuss your goals and options with a New Mexico trust formation lawyer to better understand what type of trust is best for you and your estate plans.
Generally speaking, a valid trust must have parties in three different roles: 1. The grantor (or trust creator), 2. The trustee (who administers the trust), and 3. The beneficiary (for whose benefit the trust was created). In certain living trusts, one person may occupy all the roles at once.
A trust without a definite beneficiary is generally considered an invalid trust. There is an exception for charitable trusts. New Mexico’s Uniform Trust Code allows for the creation of a charitable trust, set up for a charitable purpose, such as feeding the hungry or performing certain medical research, without naming a definite beneficiary.
Another type of charitable trust is recognized by the Internal Revenue Code as a Charitable Remainder Trust (CRT). The CRT can be a powerful, tax-avoidance mechanism.
If you are interested in creating a trust for the benefit of a charity, this has to be handled carefully to insure that it is enforceable.
New Mexico Financial & Family Law has decades of collective experience helping all types of clients in their estate planning goals. Whether you own a single modest property or a business empire, we are prepared to assist you in leaving behind a world that you can feel satisfied knowing you helped create. The right trust can not only greatly benefit your heir but also protect your legacy, ensuring future generations can benefit from all of the hard work you committed to during your lifetime.
Speak to an experienced attorney about your estate planning in New Mexico today when you call (505) 503-1637 or contact us online to set up a consultation.
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