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Probate and Estate Litigation Blog

Misperceptions about trusts

There are many misperceptions surrounding trusts and trust administration. For Minnesota residents, these may lead to difficulties and even later trust litigation.

In addition to the falsehood that trusts reduce taxes, trusts do not automatically provide protection against creditors. This is especially true for the living trust or revocable trust. These trusts provide the greatest flexibility and ability for modification or revocation. However, this control over assets makes these trusts vulnerable to creditors.

These trusts are commonly confused with spendthrift trusts, which are shielded from a beneficiary's creditors but not from the trust grantor's creditors. Creditors cannot attach the grantees' share of these trusts before it is distributed to them. However, these trusts are not protected from the grantor's creditors.

Another common misunderstanding is that trusts always avoid probate. Assets in the trust when the grantor dies avoid probate. However, assets that are not contained in the trust when the grantor dies still require probate if they are not titled in the grantor's name.

More specifically, bank and stock accounts, real property and mineral assets and other similar assets will not avoid probate as they are "titled accounts" unless a person specifically includes them in the trust, although it may be possible to transfer these accounts by holding them jointly or by designated them as "payable on death". .

Additionally, many estates still require probate although most of that person's assets were properly placed into the trust. This usually occurs because the grantor does not remember to transfer all their titled assets into the trust.

Protecting assets does not require everyone to transfer them into trusts, however. Persons with smaller estates may transfer their assets or use special types of ownership including joint accounts with survivorship or payable on death accounts. These POD trusts automatically transfer assets to other individuals when the grantor dies.

A lawyer can help create trusts and provide other advice that help protect an inheritance. This estate planning can help avoid disputes and other litigation.

Source: Pauls Valley Daily Democrat, "Misunderstandings about trusts," March 15, 2017

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