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Reasons Families Use Subtrusts

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 pass on inheritances and protect them from creditors or issues such as lawsuits or divorce that the heirs may face.  Subtrusts serve various purposes depending on the specific needs of the beneficiaries and the goals of the grantor.  This article delves into the reasons for incorporating a subtrust into your estate plan and explains the additional protections subtrusts can provide.

Jacksonville Estate Planning Attorney Bill O’Leary in the video below explains what a subtrust is and how it works, what additional protections a subtrust can provide, and what subtrusts are commonly used for.

What is a Subtrust?

A subtrust is a secondary trust, essentially a trust within a trust. It’s a separate entity created under the umbrella of a primary trust, often a revocable trust. The primary trust acts as a container for your assets, answering critical questions about who gets your assets, 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. Read more about trusts in our article, How Does a Trust Protect My Family after Death?

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 Is Activated?

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 for it. In addition, an appointed trustee will need to manage the trust assets including making distributions to beneficiaries and 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 it can 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 than Revocable Trusts?

Subtrusts offer enhanced protections 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 specific needs of the beneficiaries and the goals of the grantor. 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 American Academy of Estate Planning Attorneys, 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 sub-trust, 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 be used to manage assets when the first spouse dies. These sub-trusts ensure that the surviving spouse has access to the assets while maintaining the integrity of the estate plan for surviving children and future beneficiaries.  Learn more about How a Survivor’s Trust Works in Estate Planning in Estate Lawyer Bill O’Leary’s video.

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.  The A Trust is designated for the surviving spouse’s assets and the 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 Trust, 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 ongoing 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 gain access to an inheritance immediately when they become legal adults, but helps to protect assets until the children reach certain ages like 25 or upon the occurrence of life events like graduating from college.

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. By having assets in a subtrust, they bypass the court-supervised distribution process, making things smooth, quick, and easy for your family and heirs after your death.

What Additional Protections 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.

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 Trust or Credit Shelter Trust, can 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 it operates according to its terms and the grantor’s intentions.

Frequently Asked Questions (FAQs)

What is the main purpose of a subtrust?

The main purpose of a subtrust is to provide a specialized mechanism within a primary trust for managing and distributing assets according to specific conditions or for particular beneficiaries, offering enhanced protection and control over the assets.

Can a subtrust be altered after it becomes active?

Once a subtrust becomes active, after the death of the grantor, it usually becomes irrevocable, meaning it cannot be altered or undone.

How can a subtrust benefit a blended family?

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.

What is the role of a trustee in a subtrust?

The trustee in a subtrust is responsible for managing the trust assets, ensuring they are distributed according to the terms of the trust, and handling administrative tasks such as filing tax returns.

Can subtrusts be created under a will?

Yes, subtrusts can be created under a will. The will itself can directly establish these trusts, or it can designate a revocable trust as the beneficiary in a pour-over will. This method ensures that the assets are transferred into the trust upon the grantor’s death.

If you would like to learn more about the role and benefits of subtrusts in estate planning, schedule a free discovery call with Team Legacy.

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