An Overview of Trusts
Trusts are estate planning mechanisms that can be used to complement or replace wills and manage property throughout one’s lifetime. A trust is a legal entity that oversees the distribution of a person’s assets by transferring their benefits and duties to various individuals.
Many people choose to create a trust for various reasons, including avoiding estate taxes or distributing money to trust beneficiaries. This property distribution approach is a common choice for many people when constructing an estate plan. This post will go over the process and the many types of trusts to think about it.
Establishment of a Trust
The fundamentals of building trust are straightforward. To establish a trust, the property owner (also known as the “trustor,” “grantor,” or “settlor”) transfers legal ownership of the property to a family member, professional, or institution (also known as the “trustee”) who will administer it for the benefit of another person (called the “beneficiary”). For their management position, the trustee is frequently compensated.
When dealing with trust property, the trustee has a “fiduciary” connection with the beneficiary, which means the trustee must work entirely in the beneficiary’s best interests. If a trustee fails to fulfill this obligation, they are legally responsible for any harm done to the beneficiary’s interests.
The grantor may operate as trustee and retain ownership of the property rather than transferring it, but they must still act in a fiduciary position. A grantor might name themself as one of the trust’s beneficiaries. The trust cannot become effective unless the grantor delivers the property to the trustee, as stated in any trust agreement.
A grantor, for example, sends money to a bank to serve as a trusted business or trustee for the grantor’s children. The bank has been directed to pay the children’s college bills when they arise, and the bank is carefully managing the funds to ensure that there are sufficient funds available for this purpose. They are fulfilling their fiduciary duty, and the children have no control over the funds and are prohibited from using them for any other purpose.
Living Trusts and Testamentary Trusts
“Testamentary trusts” and “living trusts” are the two types of trusts. Only after the grantor’s death does a testamentary trust transfer property to the trust. Many people prefer to incorporate trust in their wills to reaffirm their preferences and goals after death because trust allows the grantor to define conditions for receiving benefits and to spread the payment of benefits over time rather than making a single gift.
The testamentary trust is not created immediately at death. Still, it is frequently mentioned in a will, and as a result of the will provision, the trust property must go through probate before the trust can begin.
Example: A parent instructs in her will that her assets be handed to a trustee or co-trustee upon her death. The trustee manages the investments to benefit the parent’s children until they reach the age when the parent deems they are ready to handle the assets on their own.
A living trust, sometimes known as an “Inter Vivos” trust, begins during the grantor’s lifetime but may be designed to continue after they pass away. If all assets subject to probate are transferred into the trust before death, this trust may help avoid probate. A living trust can be “revocable” or “irrevocable.” A revocable living trust’s grantor can amend or revoke the trust’s provisions after it is established. An irrevocable trust’s grantor, on the other hand, irrevocably relinquishes the power to amend the trust after it is installed. A revocable trust is used to supplement a will or appoint someone to handle the grantor’s affairs if they become disabled. Even a revocable living trust normally states that it will become irrevocable at the grantor’s death.
Assets to be transferred.
Irrevocable trusts are used to transfer assets before death, avoiding probate. On the other hand, Revocable trusts are increasingly common as a way to sidestep the probate procedure. When all of a person’s assets are transferred to a revocable trust, he dies with no support. As a result, he does not need to go through the probate process to transfer his assets. Because the trust did not break with the grantor, the support of the trust does not need to be probated. On the other hand, trusts avoid probate only if the deceased person’s assets were transferred to the trust while they were alive. Most revocable living trusts are accompanied by a “pour-over” will, which stipulates that all assets not owned by the trustee should be handed to the trustee at death.
Example: Mark creates a revocable trust that directs his assets to be given to his children in equal shares upon his death. Mark transfers his home to the trust but does not do so with some of his rental properties. The trust can distribute the house without probate if Mark dies, but the rental real estate will have to go through probate. The probate court will order that the rented real estate be handed to the trustee, who will then distribute it according to the rules of the trust based on the will.
Trustees for Successors
While a grantor may appoint himself as trustee of a living trust during his lifetime, he should name a successor trustee to operate in his place if he becomes disabled or dies. The successor trustee must distribute the trust’s assets according to the trust document’s instructions when the grantor dies. When a grantor dies, many states require that specific parties be notified.
An attorney can teach you more about trusts.
The tax, governmental assistance, probate, and personal implications of trusts are significant. It’s essential to speak with an experienced trust attorney who can assist you at any process point, from initial conversations to trust document execution.