Trusts: An Overview
Trusts can supplement or replace wills and also help manage one’s property during life. A trust helps manage the distribution of property through transferring obligations and benefits to different individuals. There are numerous uses for a trust, which is why this technique is popular amongst people wishing to create an estate plan.
Creation of a Trust
Creating a trust is fairly basic. When creating a trust, a property owner (called the “trustor,” “settlor,” or ”grantor”) transfers legal ownership to a person or institution (“trustee”) in order to manage the property for the benefit of another (the “beneficiary”). A trustee normally receives a compensation for their management role. This creates a “fiduciary” relationship between a trustee and beneficiary, meaning that a trustee is required to act only in the best interests of the beneficiary when managing the trust property.
If the trustee does not satisfy this duty, he or she will be legally accountable to the beneficiary for any damages to his or her interests. A grantor can act as the trustee and retain ownership instead of transferring the property, but he or she will still be required to act in a fiduciary capacity. A grantor can also name himself or herself as a beneficiary of the trust. However, in a trust arrangement the trust will not be able to become effective until the property is transferred to a trustee.
Testamentary and Living Trusts
Two very broad areas exist in the world of trusts, “living trusts” and “testamentary trusts.” A living trust, also known as an “inter vivos” trust, begins during the life of the grantor, but has the ability to continue past his or her death. This kind of trust helps in avoiding probate if all the assets subject to probate are transferred into the trust before the grantor’s death. Living trusts can be “revocable” or “irrevocable.”
If the living trust is revocable, a grantor may revoke or change terms of the trust at any time after the trust starts. This form of trust normally acts as a way to name someone to manage the grantor’s affairs in the event he or she becomes incapacitated or it is used a supplement to a will. In an irrevocable trust, the grantor must forever give up the right to make changes once the trust is created. Many revocable living trusts state that it will become irrevocable upon the grantor’s death.
Testamentary trusts transfer property into the trust only after the grantor’s death.
Many prefer a trust in their wills for reinforcing their goals and preferences after death because trusts allow a grantor to spread payment of benefits over time opposed to one gift and to state certain stipulations for receipt of benefits. A testamentary trust will not be automatically created upon death; instead it is usually specified in a will. As a will provision, the trust property will have to go through probate before commencement of the trust.
An irrevocable trusts avoids probate by transferring assets before death; yet revocable trusts are still a more popular way of avoiding the probate. A person who transfers all of their assets to a revocable trust owns no assets at their death. Because nothing is owned at the time of death, no assets have to be transferred through the probate process.
The trust does not die when the grantor of the trust die, therefore the trust assets will not have to be probated. Keep in mind that a trust will avoid probate only if all or most of the grantor’s assets have been transferred to the trust prior to their death. Many revocable living trusts are included by a “pour-over” will, which allows for the possibility that some assets have not transferred. Often this “pour-over” will state that at death, all assets that are not owned by a trustee of the trust be transferred to the trustee.
Even though a grantor can name themselves as a trustee of a living trust during their life, it is best to also name a successor trustee in the event he or she becomes disabled or dies. Upon the grantor’s death, a successor trustee distributes the assets of the trust according to the directions in the trust document. In numerous states, upon the death of the grantor, certain people must be notified.
Getting Help With a Trust
A trust has significant probate, tax, governmental assistance, and personal ramifications, so it is important that you consult an experienced estate-planning attorney during all stages of the process — from initial discussions to the signing of trust documents.