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Defining a Subtrust and Its Benefits

Defining a Subtrust and Its Benefits
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 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 lawsuits or divorce. Subtrusts serve various purposes depending on…

Defining a subtrust and its benefits: 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 creator. Subtrusts are one tool that estate planning attorneys like Beck, Lenox and Stolzer Estate Planning and Elder Law, LLC, use to help families pass on inheritances and protect their heirs from creditors or issues such as lawsuits or divorce. Subtrusts serve various purposes depending on the beneficiaries’ specific needs and the grantor’s goals. This article delves into the reasons for incorporating a subtrust into your estate plan and explains the additional benefits subtrusts can provide.

What Is a Subtrust?

A subtrust is created as part of a primary trust, often a revocable trust. The primary trust 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.

How Do Subtrusts Work?

Subtrusts remain dormant within the primary trust until a triggering event, typically the death of the grantor. Upon this event, the subtrust becomes active and, in most cases, irrevocable. This means that the terms of the subtrust cannot be changed.

What Happens after a Sub-Trust becomes Active?

The activation of a subtrust initiates a process known as trust administration. This process involves naming the subtrust, obtaining a tax ID and setting up a bank account. In addition, an appointed trustee will need to manage the trust assets, including making distributions to beneficiaries, filing tax returns and ensuring that the trust operates according to the trust provisions and the grantor’s intentions.

How Do Subtrusts Work If Created Under a Will?

Subtrusts can also be effectively created under a will, offering a flexible approach to estate planning. The will itself can directly establish these trusts 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 grantor’s death.

How are Subtrusts Different from Revocable Trusts?

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 divorce or lawsuits.

What are Subtrusts Commonly Used for?

Subtrusts serve various purposes, depending on the beneficiaries’ specific needs and the trustor’s goals. They can be used to protect beneficiaries who are minors, financially irresponsible, or have special needs. Subtrusts can also safeguard assets from beneficiaries’ creditors, ensuring that the inheritance is used as intended by the grantor.

What Types of Subtrusts are There?

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 sub-trusts 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.

Survivor’s Trust

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 for surviving children and future beneficiaries.

B Trust or Decedent’s Trust

If the grantor of the first trust wants to provide separate inheritances to the surviving spouse and children, the trust can direct that the trust be divided into two subtrusts, known as an A/B split trust. A Trust is designated for the surviving spouse’s assets, and B Trust, or the Decedent’s Trust, is set up for the assets intended for the children.

Bypass, Credit Shelter, or Marital Deduction Trust

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’s designed to hold approximately half of the assets, with the surviving spouse often acting as both the trustee and a beneficiary.

However, their 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.

Pot Trust

A pot trust is created to pool resources for multiple beneficiaries, ensuring equitable distribution 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 25, or life events, like college graduation.

How Do Subtrusts Avoid Probate?

One of the primary reasons for establishing a subtrust is to avoid the lengthy and often costly process of probate. Having assets in a subtrust bypasses the court-supervised distribution process, making things smooth, quick and easy for your family and heirs after your death.

What Additional Benefits Do Subtrusts Provide?

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.

Key Takeaways

  • How Subtrusts Work: Subtrusts are specialized trusts within a primary trust that become active upon the grantor’s death.
  • Enhanced Asset Protection: Subtrusts provide additional protections against creditors and legal challenges, safeguarding beneficiaries’ inheritances.
  • Diverse Applications: They serve various purposes, including managing assets for minors, financially irresponsible beneficiaries, or those with special needs.
  • Subtrusts in Wills: Subtrusts can be created under a will, offering flexibility in estate planning, with the ability to establish different types of trusts based on specific needs.
  • Blended Family Solutions: For blended families, certain types of subtrusts, like the Bypass or Credit Shelter Trust, ensure fair asset distribution among the surviving spouse and children from previous marriages.
  • Importance of Trust Administration: Proper administration of a subtrust is crucial to ensure that it operates according to its terms and the trustor’s intentions.

For more information on defining a subtrust and its benefits, and how it can benefit you and your family, schedule a free consultation by phone with Jayson Lenox or Caroline Daiker Stolzer at Beck, Lenox and Stolzer. Click here to get to our online calendar.

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