Although a Last Will and Testament is the most common estate planning tool, a trust is also a popular method. Often, trusts will be part of a comprehensive estate plan for a number of reasons, not the least of which is the fact that trusts can help avoid probate. Here are the basics you need to know before setting up a trust.
What Is a Trust?
A trust is a legal entity created to hold property for one or more beneficiaries. A trust is created by a person who can be referred to as a Settlor, Grantor, Trustor, or Maker. The Settlor transfers property to a Trustee he or she appoints, and the Trustee then holds that property for the beneficiaries.
Trusts fit into one of two categories: either testamentary or living (inter vivos) trusts. Testamentary trusts are most often activated by a provision in the Settlor’s Last Will and Testament and do not become active during the lifetime of the Settlor. However, a living trust can be activated during the Settlor’s lifetime. Living trusts can be divided into revocable and irrevocable living trusts. The type of trust you create will depend on who the beneficiary is and factors such as estate size.
How Are Trusts Contested?
You have probably heard of a Will being contested when a beneficiary challenges the validity of a decedent’s Will once it has been submitted for probate, which can cost a great deal of time and money. People usually create trusts in order to avoid both probate and litigation. Though the process is a bit more involved than contesting a Will, a trust can still be contested.
Just like with a Will, a trust cannot be contested just because one party is not happy with the terms. For example, one person being left out of a trust would not be a valid legal reason to challenge the trust. One of the legal reasons allowable under state law must be used to make a challenge. For instance, you could challenge the creator’s capacity to make the trust if their mental state is in question. One could also contest a trust by claiming that someone was subjecting the Settlor to “undue influence” at the time the trust agreement was created. Flaws with the trust agreement itself can also serve as grounds for a legal challenge to a trust.
To contest a trust you will also have to have “standing.” Standing is the legal term used to refer to someone who has the legal right to initiate a legal proceeding. In the case of a Will or trust contest, a person must usually be a beneficiary, heir, previous beneficiary, or sometimes a creditor in order to have the standing required to proceed.
If you have standing and you believe you have a valid legal reason to contest a trust, a trust contest can be initiated by filing the necessary legal documents with the appropriate court.
Preventing a Trust Contest – No Contest Clauses
If you are contemplating the use of a trust to distribute your estate and you want to discourage challenges to that trust, you may wish to discuss the addition of a “no contest” clause with your trust attorney. A “no contest” clause effectively states that if a beneficiary unsuccessfully challenges a trust (or Will) that they forfeit the inheritance designated for them in the trust. Of course, you must gift something to that person in your trust for a no contest clause to work as intended. For example, imagine that your estate is worth $1 million and you are concerned that a sibling might challenge your trust. To discourage that challenge you could include a provision that gifts $50,000 to your sibling and add a no contest clause. Your sibling forfeits that $50,000 gift if he/she contest the trust unsuccessfully. State laws also govern the enforceability of no contest clauses to be sure to discuss your desire to add one with your trust attorney.