TRUSTS
At one time, trusts were the domain of the wealthy, but over the past few decades they have become useful planning methods for those of more modest wealth. A Trust is a legal document with a set of conditions and instructions directed by the Grantor (creator) to a Trustee, the manager of the Trust.
Trusts. like wills, are ultimately used to distribute assets to beneficiaries. They can accomplish this outside the process of probate which can be an advantage. In addition, they can include personal tax planning. A Trust can be a very good way to manage assets by the person who established the trust, the Grantor, who may also be the initial Trustee. In particular, if that person were to become temporarily or permanently disabled, the Trust allows for a Successor Trustee to easily step in and control and manage the assets in Trust name. That is convenient as it can be done without having to assign a court appointed guardian. The Successor Trustee is also in charge of distributing the assets to the beneficiaries after the death of the Grantor, in accordance with the Trust provisions. There are many things that can be accomplished in the management of Trust assets and the timing of the distributions to the beneficiaries. It is quite common for the Trust to be maintained for the benefit of the surviving spouse and then later for the other beneficiaries after the death of the surviving spouse. There can be a lot of flexibility in the writing of the instructions of the Trust and the operation of the Trust over time. However, there are tax rules and State laws that need to be followed.
There are different types of Trusts:
The Revocable Living Trust
This is the most common. This is when a person, the Grantor, creates a Trust and usually becomes the Trustee (manager) at that time. it is like an alter ego or a personal corporation. This Trust will most likely include the Grantor’s name in the title. The Trust will often use that person’s own Social Security number for tax and business purposes although you can have a new tax ID if desired. It is very important to fund the Trust with assets that are then registered in the name of the Trust. Assets NOT in Trust name will not be governed by the Trust. The Grantor can change the terms of the Trust, remove assets from the Trust, add new assets to the Trust, or terminate the Trust entirely at their discretion. If there is another person as Trustee, the Grantor can remove them. Keep in mind that the Trust owns the assets, not the Grantor or Trustee. However, if they are both the same person, in this type of Trust, it doesn’t make a difference because the Grantor controls everything anyway. This type of Trust in most cases, will NOT offer asset protection from personal liability. This Trust usually works well with intangible assets such as financial assets but can certainly include other assets such as real estate.
The Irrevocable Trust
This one, as the title indicates, cannot be changed. This is used for advanced estate planning and can include asset protection. Sometimes this type of Trust may be used for charitable donations that can include tax benefits. In most cases, the Grantor may not be Trustee. If the Grantor tries to retain too many characteristics of ownership or too much control over this type of Trust, there are rules that may cause the Trust, the Trustee and the Grantor to encounter serious problems regarding taxes and other liabilities. Remember, the Trust owns the assets, not the Grantor or Trustee. This Trust requires careful consideration and planning.
The Testamentary Trust
This is a Trust that is included inside a person’s Will and therefore does not become effective until after death. It activates during Probate and becomes Irrevocable. This Trust though can still have a lot of flexibility designed in it when the Will is first written. This Trust can allow the Trustee to continue operating the Trust after the conclusion of Probate and can go on for many years.
There is a dangerous side to Trusts that must be addressed. It has to do with the Successor Trustee. The job of Trustee is very difficult and can require broad knowledge in legal and tax issues and asset management. If there are unusual investments or especially a business in the Trust, it gets even more complex. The Grantor may often choose a relative or friend for this important position who is not really qualified for the job. It may seem natural to do so but will most likely require certain professional help. The Trustee hires the lawyers, accountants, agents, etc., not the other way around. The Trustee has a legal fiduciary duty to protect and manage the Trust assets and can be held personally liable for the failure to do so competently. Often, there is no one supervising this process. Unlike Probate, which a Court will oversee to make sure everything is done correctly, Trust administration is usually a private operation. As such, mistakes, poor judgments or even fraud can go on for years. The Trustee may unintentionally or otherwise purposely, ignore certain laws and functions and fail to properly report Trust operations or problems to the beneficiaries. By the time, they discover anything, it may be too late and significant asset value could be lost or liabilities incurred. Many family disputes are created by an inadequate or irresponsible Trustee. A possible solution may be to name a knowledgeable and trusted person as Co-Trustee to serve alongside the relative or friend. You can also name a Trust Protector or Trust Adviser to help manage. In some cases, it may be best to use a Corporate Trustee such as a bank. The best solution may be to make sure everyone is informed as to the estate plan and the wishes of the Grantor and the requirements after death.
NOTE: There are a lot of do it yourself materials and fill in the blank documents available. Estate planning and trusts are very technical subjects. An attempt to do it yourself can cause more problems than you can imagine. It is best to use a local attorney who specializes in this area of law to review your plans and create the necessary documents you will need.
There is a previous post “Estate Planning With Young Children” June 2, 2018, that may also be helpful.