A subtrust is a separate entity created under the umbrella of a primary Trust or a Will. A subtrust becomes active based on the terms of the Trust or Will when certain events happen, such as the death of the primary grantor or testator (creator). Subtrusts are one tool that estate planning attorneys use to help families pass on inheritances and protect their heirs from creditors or issues such as bankruptcy, lawsuits or divorce. Subtrusts serve various purposes depending on the beneficiaries' specific needs and the creator's goals. This article delves into the reasons for incorporating a subtrust into your estate plan and explains the additional benefits subtrusts can provide.
A subtrust is created as part of a primary Trust (irrevocable or revocable) or a Last Will and Testament. The primary Trust or the Will acts as a container for your assets, answering critical questions about who gets them, what they receive, when and how. The subtrust, on the other hand, is like a specialized compartment within this container, designed for specific purposes or beneficiaries.
Subtrusts remain dormant within the Will or the primary Trust until a triggering event, typically the death of the creator. Upon this event, the subtrust becomes active and, in most cases, irrevocable. This means that the terms of the subtrust cannot be changed.
The activation of a subtrust initiates a process known as trust administration. This process involves naming the subtrust, obtaining a taxpayer identification number, and setting up a bank or investment account. In addition, a Trustee, named by the creator, will manage the trust assets, including making distributions to beneficiaries pursuant to the creator's terms laid out within the Will or Trust, filing tax returns and ensuring that the subtrust operates according to the trust provisions and the creator's intentions.
Subtrusts can be effectively created under a Will, offering a flexible approach to estate planning. The language within the Will itself can directly establish these subtrusts or designate a revocable trust as the beneficiary in what is known as a “pour-over” will. This method ensures that the assets are transferred into the trust upon the creator's death.
Subtrusts offer enhanced protection for your assets and beneficiaries. Unlike a revocable trust, which can be altered during the grantor's lifetime, a subtrust becomes irrevocable upon activation, providing a firmer legal structure. This irrevocability protects the assets from the beneficiary's creditors and in cases of legal challenges, such as bankruptcy, divorce or lawsuits.
Subtrusts serve various purposes, depending on the beneficiaries' specific needs and the creator's goals. They can be used to protect beneficiaries who are minors, are financially irresponsible, have outside influences, have special needs, or are spouses of a second marriage. Subtrusts can also safeguard assets from beneficiaries' creditors, ensuring that the inheritance is used as intended by the creator.
Subtrusts have many different names and types, each serving a unique purpose in estate planning, as outlined in an article by the American Academy of Estate Planning Attorneys titled Basics of Estate Planning: Trusts and Subtrusts.
Below is a review of some of the more common types of subtrusts that can be established in the Trust document or Will. In creating a subtrust, there are no strict rules regarding the naming of the trust. The key is clarity and the avoidance of any potential copyright infringement. The name should accurately reflect the trust's purpose without causing confusion.
For married couples, Survivor's Trusts can manage assets when the first spouse dies. These subtrusts ensure that the surviving spouse has access to the assets, while maintaining the integrity of the estate plan to ensure that any remaining trust assets are passed on to surviving children and future beneficiaries.
If the creator of the first trust wants to provide separate inheritances to the surviving spouse and children, the Trust or Will can direct that the assets are to be divided into two subtrusts, which is known as an A/B split trust. An A subtrust is designated for the surviving spouse's assets, and a B Trust, or the Decedent's Trust, is set up for the assets intended for the children.
For blended families, a specific type of subtrust, which may be referred to as a Bypass, Credit Shelter Trust, or a Marital Deduction Trust, can be particularly beneficial. This type of trust is irrevocable, meaning it cannot be altered or undone once established. It is designed to hold approximately half of the assets, with the surviving spouse often acting as both the Trustee and a beneficiary.
However, the surviving spouse's access to the funds is not unlimited. The primary purpose of this trust is to ensure that there are assets preserved for the children from the first deceased spouse's previous marriage. This arrangement provides a balanced approach, safeguarding the interests of both the surviving spouse and the children from prior marriages, making it an ideal solution for blended family situations in estate planning.
A descendant's trust is created to ensure proper distributions (generally for health, education, maintenance and support) until a certain condition is met. It can also ensure that young adults do not immediately gain access to an inheritance when they become legal adults. It helps protect assets until the children reach certain ages, like 30 or life events, like college graduation.
A special needs subtrust can be established to ensure that, upon the creator's death, the assets to a disabled heir are available for that heir's benefit while preserving any governmental or public assistance benefits for which the heir may qualify.
Subtrusts provide a layer of protection for beneficiaries against their creditors or their own irresponsibility. This is particularly important in cases where a beneficiary may face financial difficulties, divorce, legal disputes, or even car accidents. The subtrust provides a shield for the assets to protect them from external claims. If you would like to learn more about the role and benefits of subtrusts in estate planning, request a consultation with our team.
The main purpose of a subtrust is to provide a specialized mechanism within a primary Trust or Will for managing and distributing assets according to specific conditions or for particular beneficiaries, offering enhanced protection and control over the assets.
Once a subtrust becomes active after the death of the creator, it usually becomes irrevocable, meaning it cannot be altered or undone.
In blended families, a subtrust can ensure that assets are fairly distributed between the surviving spouse and the children from previous marriages, protecting the interests of all parties involved.
The Trustee of a subtrust is responsible for managing the trust assets, ensuring that they are distributed according to the terms of the trust, and handling administrative tasks, such as filing tax returns.
Yes, many times, subtrusts are created under a Will. The Will itself can directly establish these trusts or designate a revocable trust as the beneficiary in a pour-over will. This method ensures that the assets are transferred into the subtrust upon the creator's death.
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