This is Part 2 of a 4-Part series discussing trusts.

  • What is a Trust? (Part 1 of 4)

  • For what purposes do you use a Trust? (Part 2 of 4)

  • Trusts & Marriage / Trusts & Divorce (Part 3 of 4)

  • The Death Tax & Trust Income Taxes (Part 4 of 4)

In this post, I'm going to discuss what trusts are generally used for. There are literally dozens of different purposes for which trusts help to accomplish. An entire law school course on subject still wouldn't cover all of them in much detail. So I'm going to discuss the top four reasons why people use trusts.

If you have any specific questions about how these topics might affect you or how you might benefit from them, please reach out to an estate planning lawyer near you. I am literally (I don't mean figuratively; I mean literally) incapable of answering your questions. (See below).

What goals can a Trust help you accomplish?

The following are some of the more common purposes.

1) Trusts are used to avoid probate.

Here's the deal: we're all going to die. Many of us are going to die while still owning some shit. Something has to be done with the shit you leave behind. So what happens to it?

Anything that has a legal title to it needs to have that title transferred to a new owner. I'm generally referring to your bank account, your car, and your house. Basically, pretty much anything for which someone asked you for your social security number when you bought it or put money into it.

Now, the default process to transfer title in the event of someone's death is something called "probate." Probate is where the people who are to inherit your shit when you die go to court to say, "hey, Joe is dead now, and he's got a bank account, a car, and a house. We're here to collect our share of the shit." This process is of going to court to deal with a dead person's shit is generally called probate, and it is done in "probate court."

So the court will take their sweet ass time during this process, usually a minimum of 6 months, up to a year or even 18 months or more in some cases. During this time, as the person inheriting the Joe's shit, you don't get anything. You just get to pay a lawyer for this part.

The court will do a full accounting of all Joe's assets and debts, then they have to analyze a Will to see what property Joe wanted to give to whom (if a Will exists), and they have to make sure that everyone is who they say they are (making sure the right people get what they're supposed to get), they have to make sure everyone who's supposed to be there is present and not missing (if someone is missing, then the court has to figure out what to do about the missing heir and how to divide up that person's share)...

It's a long and drawn out process, even when there are no heirs who contest the validity of the Will. If one of the heirs (or someone who isn't an heir) makes a claim to the court that the Will isn't valid, then a whole other can of worms opens up; and everyone has to deal with that shit, too.

Oh, and creditors will have an opportunity to make claims against Joe's estate. You know that Chase credit card he had with the maxed out balance? Yeah, Chase is going to make a claim against Joe's assets to satisfy his credit card debt. Student loans, mortgages, you name it. If Joe owed money to someone, then probate is the time when they get to stake their claim on Joe's shit.

And! This process isn't free. Court fees, lawyer fees, administrative fees... all this has to be paid for, and the payment for all this is likely coming from the value of Joe's assets, liquidated for the purpose of satisfying these debts and expenses, except for your lawyer as an heir during all of this, you're likely paying them something out of your own pocket. And this all happens before you get a chance to get your hands on Uncle Joe's my little pony and furry porn collection.

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But! pretty much all of this can be avoided with a proper estate plan. If Joe actually gives a shit about his family, he'll sit down with an estate planning attorney to figure out the best way for his family to avoid probate.

One potential way to avoid probate is to transfer assets into a trust before Joe dies. That way, the assets are not owned by Joe when Joe dies; and thus, there is nothing to probate. Added bonus: this can be a means to tell some of Joe's creditors to go fuck themselves after Joe dies.

2) Trusts are used to provide for someone who isn't capable of managing themselves.

In my previous post, I mentioned examples where Mommy and Daddy die and leave behind a 10 year old child and where my buddy and his sister have a mom who can't be trusted with the proceeds from a life insurance policy in the event either my buddy or his sister dies before mom.

In those examples, the point of the trust is to give assets to someone else because you don't trust a certain someone to manage the assets by themselves. As I said before, the 10 year old cannot be trusted with managing his dead parents' shit, and my buddy's mom can't be trusted to manage her own shit. But these people still need to be taken care of. How do we accomplish this?

Well, you take the assets that you would have wanted to go to them (the Beneficiary) and you transfer those assets to someone else (the Trustee), and you give the Trustee a set of specific instructions (the Trust Instrument or the Trust Documents) saying who they are going to take care of and how they are supposed to take care of them.

3) Trusts are used to protect assets from third parties.

In my previous post, I gave the example of the company car. In that example, I said that even though you are using the company car, the company car isn't actually yours, in the sense that you do not have legal title to it. That means if you were sued, the person suing you couldn't take your company car because the car isn't yours to be taken in the first place, because you don't hold legal title to it.

Same concept with a trust. Generally, you can't have something taken away from you that you don't own. In some cases, it's possible to transfer assets you own to a third party, making them the trustee holding legal title, and making yourself a beneficiary holding equitable title.

Simple example: Mark wins the lottery for $1M and transfers the winnings to a trust and establishes himself as the beneficiary. The trustee is to invest the $1M winnings, and Mark is to receive a yearly payout from the investment interest (say, $40,000ish per year).

In the following year, Mark gets sued for doing some dumb shit, say his dumb ass was responsible for a $1M building being destroyed by something Mark did. Mark loses the lawsuit and now owes the building's owner $1M. Can the building's owner get Mark's lottery winnings from last year?

Answer: potentially not. If instead of setting up a trust last year, Mark had just left the lottery winnings sitting in his bank account, then the building's owner would very likely be able to get those lottery winnings from Mark's bank account to satisfy the lawsuit judgment against Mark. But, since Mark transferred legal title to the lottery winnings to someone else, Mark no longer has legal title to the money; and thus, the building's owner may have some difficulty obtaining those lottery winnings to satisfy the money Mark owes him.

These sort of situations are highly, highly fact dependent and also pretty much entirely depend on your jurisdiction for this to be an effective means of asset protection.

I'll cover trusts and asset protection in more detail in Part 3 of my 4-Part series on trusts.

4) Trusts are used to reduce tax liability.

For the most part, this section only really applies to people who have more than $5 million in assets. If you have more than $5 million in assets when you die, then there exists the possibility that a portion of your estate will be taxed before the remainder of your estate is distributed to your heirs.

To avoid this, there are potentially ways to transfer certain assets to a trust with the effect of reducing the potential tax burden at the time of your death.

If you're reading this, chances are that this doesn't apply to you because mofos with $5 million in assets are not learning about trusts for the first time on reddit.

If you want more information about "death taxes," jump to Part 4 of my 4-Part series on trusts.

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To conclude, there are dozens of other types of trusts, each with their own specific purpose. I've only scratched the surface of a very complex area of the law.

Also, what you need to know is that, for the most part, trusts are a creature of state law, meaning that every state has their own trust laws; and even if there are similarities between statutory laws with any two states, the courts of each state interpret their laws differently from any other state.

The point is that everything I'm telling you is a super generic overview of a segment of law that is entirely dependent on the rules of your specific jurisdiction.

Also, nothing in this 4-Part series is designed for you to take as legal advice because it sure as fuck is not intended to be legal advice. I don't know you, and you fucking don't know me. Hell, you don't even know if I really am a lawyer. As far as you know, I'm just some random asshole talking shit on a web forum.

If you want legal advice, go find someone who you can verify is a real lawyer.