If you are a parent, you have probably thought about creating or updating your will. Trusts are often used by parents to protect assets for their children. However, there are many different kinds of trusts. You want to establish the right trust for your situation and want to be sure that it is established correctly. Therefore, below is a high level guide to Minnesota trust law for parents.
What is a trust?
Before you can know what kind of trust is right for you, you should know what a trust is. It is an arrangement where the creator of the trust assigns responsibilities for the assets to another, a trustee, for the benefit of one or more beneficiaries.
The trustee has fiduciary duties towards the disposition of the trust, meaning the trustee must make prudent decisions that are for the exclusive benefit of the beneficiary or beneficiaries and in their best interests. The trustee must also follow the terms of the document creating the trust which is called the trust instrument. If the trustee uses the trust assets for his or her own benefit, then the trustee has performed self-dealing and has violated his or her fiduciary duties.
Why would you need a trust?
Though trusts can be established for a variety of reasons by both individuals and organizations, the most common trust is one established by a parent for the benefit of a child. If a parent dies without a will or leaves money to a minor child in a will without the establishment of a trust, the probate court will get involved and the proceedings can be overly complicated. A trust allows you to direct the disposition of the assets.
However, the child need not be a minor one to be a beneficiary of a trust; developmentally disabled or financially immature adult children are often the beneficiaries as well. The trust can also define a point in which the beneficiary or beneficiaries are entitled to the full distribution of assets, including hitting a certain age or marital status.
What kind of trusts are there?
Testamentary trusts are those that are established upon the death of the creator and are addendum to a will. Because the trust is created upon the death of its creator, it cannot avoid probate.
Living trusts are established during the creator’s lifetime. These trusts can either be revocable or irrevocable. If the trust is revocable, then the trust assets are still owned by the creator and the creator can amend or terminate the trust at any time. The creator must also treat the income from the trust as his or her income for tax purposes. The assets of the trust are also subject to the creator’s creditor attacks.
Irrevocable trusts cannot be amended or terminated by anyone once created. As such, the assets of the trust are owned by the beneficiary or beneficiaries, even if they cannot control them. The trust income will typically be reported on a schedule K-1 by the beneficiary and the assets are typically safe from the creator’s creditors (however, the creator cannot establish an irrevocable trust and be the beneficiary for the purposes of avoiding creditor attacks).
Do I need to have an attorney to draft a trust instrument?
Though trust templates are available online or with quick legal workbooks, each instrument is unique and deserves professional attention and consultation. A poorly drafted trust instrument may invalidate the relationship and fail to protect the assets and beneficiaries intended. A good estate planning attorney will be able to provide the appropriate advice given the complexity of your circumstances and size of estate.
If you are a Minnesota resident considering your options for protecting the future of your children through wills and trusts, please contact us for a consultation.