7 Questions You Were Too Afraid To Ask About Trusts

Attorney Chris McNeal answers 7 trust questions you were too afraid to ask:

1) What is a trust?Arkansas trust questions answered

Simple. A trust is basically an agreement in which one person (a “trustee”) holds property for the legal benefit of another.

2) You say “basically.” Is there a more formal and legalese-heavy definition of a trust?

Of course. In Arkansas, the requirements for creation of a trust, which I paraphrase from Ark. Code Ann. § 28-73-402, are generally that:

  • the creator of the trust has capacity to create a trust;
  • the creator of the trust indicates an intention to create the trust (regardless of whether written, although I highly recommend that every legally consequential agreement be in writing);
  • the trust has a definite beneficiary;
  • the trustee has duties to perform; and
  • the same person is not the sole trustee and sole beneficiary.

On top of this, the Arkansas Trust Code and judicial opinions provide numerous exceptions to and elaboration on these requirements.

3) If you have to give your property to someone else, why would anyone ever make a trust? I want to keep my property.

Notice that nothing in the definition of a trust prevents a trustee from also being a beneficiary. If the person who creates the trust (we call this person the “Settlor”) is also a beneficiary under the trust, the only requirement would be that this person not be the only beneficiary. And just because someone else is a beneficiary doesn’t mean they have to receive anything during the Settlor’s lifetime.

4) Yes, but aren’t you dodging the question?

Yes.

Because trusts have many potential uses, the best answer I can give is to provide a few examples of the most common ones.

First, trusts serve as substitutes for wills and the probate system. When you die, the property you held during your lifetime as trustee is held by a successor trustee. Property held by a trustee is not legally recognized as being part of your estate. This means that trust property goes straight to your heirs without having to go through the probate system, which usually takes between 6 months to a year and is all public record.

Second, trusts give you some control over how your assets are managed after your death. For example, if you die with a 19 year old who isn’t very good at money management, you can direct how, when, and on what terms he or she receives assets, so that they are not used frivolously. Another example might include your ownership of a company. If your business assets (usually corporate “shares” or “units”) are in trust, instead of your heirs taking ownership of your business and likely being forced to liquidate it, a professional trustee can manage your business assets and distribute the income to your heirs—potentially increasing the benefit to them.

Finally, trusts are useful for Settlors who become incapacitated. While the Settlor might be the initial trustee, a person who has agreed to be a successor trustee can manage the trust’s assets while the Settlor for whatever reason does not have the capacity to manage his or her affairs. A trustee succession, as opposed to an appointment for a guardianship or conservatorship, almost never requires a court order, saves time and expense, and is private.

5) I heard that I can protect my assets from taxes and creditors by putting them into trust. Is this true?

Almost always not. This is a common misconception. The law for purposes of satisfying debts generally does not distinguish between property you have put into trust and property you have kept to yourself. Further, you are asking for big trouble if you try to “hide” property in a trust during property disclosures that are commonplace during divorce and child support proceedings.

However, well-drafted trust agreements can protect assets against the creditors of the settlor’s heirs. Such trusts are called “Spendthrift Trusts” and can be created in a variety of ways. Arkansas

6) Help! I need a trust because I’m afraid my farm will be taken by death taxes!

First, take a second to breathe. I have good news for you. Since 2010, at least the first 5 million dollars of estate are exempt from any estate taxes. I say “at least” because the $5 million number increases with inflation each year. The exemption in 2015 was $5.43 million.

But it gets better.

All transfers between spouses are exempt, and the second spouse to die gets a credit for first spouse’s exemption. That means that if you are the last to die, the first $10.8 million dollars of your estate that pass to beneficiaries will be exempt from any taxes.

Don’t have that kind of money? Few people do. In fact, only about 1 in 700 deaths will result in any estate tax, and 99.98% of estates will not have an estate tax. As for your farm, there were only 20 farms in 2013 that owed any estate tax whatsoever. If you’re one of those 20, there are methods of significantly reducing estate taxes. And almost no states, including Arkansas, impose an estate tax.

Estate taxes were a major concern in the 70s, when the exemption was less than $150,000 and the maximum tax rate was 70%. Those days are gone, and it is highly unlikely that either you or anyone you know will owe them.

7) Are trusts worth it?

For some people, definitely yes. For others, definitely no. And then there are other for whom the best answer is maybe. The only way I can advise you is to meet with you and ask a bunch of questions. Call me at 501-777-7777, and we can talk.