Trusts? I know, I know–it’s been mentioned and talked about LOADS of times here on the blog. (It’s a AWESOME estate planning tool after all!)
But I realized we haven’t really done a deep dive on trusts yet (all the important whats, hows, and whos), so let’s do that today, shall we? (The perfect time is now, they say!)
Grab a cup of your favorite beverage, and here we go.
First, the fundamentals!
What is a trust?
A trust is an arrangement where a person or entity (called the trustee) holds the properties of a person (the trustor) for the benefit of another person or persons (the beneficiary).
Regardless of the kind of trust created (we’ll get into this later!), all trust agreements involve this three-part legal relationship where the trustee takes control and manages the property under the trust, up until it’s time to pass some or all of it to the beneficiary.
What are the roles of the parties to a trust agreement?
To recap, a trust agreement involves three key players: trustee, trustor, and beneficiary/ies. Certainly, they have different roles to play to make the whole arrangement work. Let’s go over them one by one!
The trustor (also, grantor) is the owner of the properties that are to be transferred into the trust. As the property owner, the trustor is the one who:
Creates/Executes the trust agreement;
Designates who the trustee and beneficiary shall be;
Makes known his/her wishes regarding property administration and distribution; and
Gives the trustee the right to hold title to the property under the trust for the benefit of the chosen beneficiary.
The trustee is the person chosen by the trustor to manage the money and other assets in the trust. This can be a real person or a trust company–whatever and whoever the trustor is most comfortable with! I’ve already outlined what a trustee is expected to do here (and what to consider in choosing a trustee, more importantly), but essentially, some of the trustee’s responsibilities are to:
Keep an updated inventory of the properties in the trust;
Protect the assets; and
Act in accordance with the trustor’s wishes and instructions.
Having been especially and carefully chosen by the trustor, a trustee is, of course, supposed to respect and keep the trust of the latter in his/her decisions and actions pertaining to the properties in the trust. Remember: the trustor is the properties’ legal holder, not for his or her self-interest but for the benefit of another person, the beneficiary!
Spoiler alert - for MOST people that create a trust, they are both the trustor AND the trustee during their lifetimes.
The beneficiary is the person or persons for whom the trust agreement is created. Being merely the lucky receivers of the assets, beneficiaries, generally, do not have any responsibilities under the trust. (just to accept the donation, pretty much!)
At the very least, though, beneficiaries must have a basic understanding of the purpose of the trust, their rights under the law with respect to the trust, and any such limitations that the trustor imposed in the trust agreement. Having a knowledge of the trustee’s responsibilities is a plus, too!
Now, onto the particulars!
What are the benefits of entering into a trust?
To recall something I’ve already disclosed in a previous post (or even if you can’t, you could perhaps already suspect?), I have my own trust. (no kidding?!)
My personal reasons for getting one might not all be related to yours (different people, different circumstances!), but typically, here are the most common reasons for entering into a trust:
To keep away from the probate process, which can cost a lot of money and take a lot of time;
To avoid financial (read: personal!) matters being public (another probate drawback!);
To maintain control over your finances after (and even prior to) passing on;
To carry out your wishes for your family and loved ones; and
To reduce the possibility of your document being challenged in court (as opposed to a will).
This isn’t an exclusive list, of course! There are more advantages that you can add to this list, but in essence, you get to avoid the major downside of having a will (probate, probate, probate!) when you enter into a trust agreement instead.
What are some of its most common types?
Not all trusts are the same. (Again, different people, different circumstances!)
Of course, people have different needs and deal with different issues with respect to their estate, so it is just understandable that there are distinct types of trust that address these varying needs and preferences. (This is a QUICK reminder of why an estate planning lawyer can be so valuable--online and DIY trusts may not address all these needs) Here’s a rundown of some of the most common trust types:
Revocable vs. Irrevocable Trusts
As you may have guessed from the name, a revocable trust is one which can be revoked or modified by the trustor/grantor at any time. Here, you are allowed to change your designated beneficiaries, manner of distribution, assets to be distributed–to adjust the terms of your trust as your financial situation changes, basically. Thus, if there’s one perk that needs to be highlighted when it comes to this type of trust, it’s flexibility.
An irrevocable trust is the exact opposite. (If you haven’t figured that out yet!) Now, before this whole irreversibility thing puts you off (Imagine not being able to change the terms of your own trust!), note that this kind of trust offers a higher level of protection its inverse can’t. For example (a real good one!), in an irrevocable trust, creditors cannot go after the assets under it to satisfy a court judgment. A relief for you and your beneficiaries!
Living vs. Testamentary Trusts
Also referred to as an inter vivos trust, a living trust is a kind of trust that is established during the grantor’s lifetime and takes effect as soon as the trust is funded, which, again, is during the grantor’s lifetime.
A testamentary trust, meanwhile, takes effect only upon the grantor’s passing. This is because testamentary trusts are generally incorporated in the grantor’s last will and testament.
Given this distinction, here comes the most important point: Between the two, only the living trust avoids the probate process. (Remember? All wills need to undergo probate!)
Charitable Trust
Established precisely for charitable giving, a charitable trust is another common type of trust that people enter into–for plenty good reasons! Apart from it being a life-affirming decision, it comes with tax benefits, too!
Curious? Learn more about charitable giving here.
Special Needs Trust
I might need to elaborate on this in a separate post, but in a nutshell, a special needs trust is one established for loved ones with disabilities, without taking away their eligibility to receive government aid.
For the reason that persons with special needs may get disqualified from receiving government support (such as Supplemental Security Income and MO HealthNet for Missourians) if they are left assets in a will or trust, a special needs trust is executed to, precisely, avoid that.
What are the steps in executing one?
While setting up a trust is an especially personal decision on your part as the anticipated trustor, you need not be alone in the process. As might be expected, there are legalities and technicalities to consider, so it’s best to have an expert on your side to deal with these for you. *ahem! ;)*
Basically, though, setting up a trust agreement entails the following steps:
Deciding which type of trust you want to set up based on your needs, circumstances, and goals;
Drafting the document itself, which shall state your chosen beneficiaries, trustee, and properties to give, among other important details;
Signing the trust agreement and having it notarized (This step varies from state to state, but we Missourians are required to have our trusts go through a notary public!); and
Transferring assets into the trust.
It all seems easy-peasy by the looks of this list, but again, there are legalities and technicalities to pay regard to–it’s a legal document after all!
Having said that, make sure to include hiring an estate planning attorney as one of your to-do’s in setting up your trust!
Whenever you’re ready, I’m here to grease the wheels for you.
Contact me or sign up for a virtual consultation. Don’t worry about having to shell out anything yet–this initial consultation is absolutely free!
Can’t wait to hear from you!
