Understanding Trusts

A National Membership Organization

For many people, talking about trusts can be confusing, but not talking about them can be devastating! A trust is simply another way for a person to hold title to their real property and assets. The intent of owning property through a trust is to protect assets from unintended creditors, maintain control of your assets during a disability, reduce or eliminate certain taxes, expenses and fees, avoid probate at death and more. Depending on what you want to accomplish when creating the document will determine what type of trust is drafted by the attorney.

There are many different types of trusts, but they will all fall under one of two headings. Either the document will be a "living trust" (also called an inter vivos trust) or a "testamentary trust."

A living trust is created, placed in force and is operational during a person's life. The person who wishes to create the trust is called a Trustor (you) and will determine how the trust will operate. The Trustor appoints a person (a trustee) who will manage the assets in the trust during the Trustor's lifetime. In most cases the trustor appoints himself/herself to be the trustee. The Trustor will also list a beneficiary or, the person(s) who will benefit from the trust during the lifetime of the trustor. Again, the Trustor usually appoints himself as the beneficiary. The Trustor will appoint someone to be a successor trustee (someone who will take over managing the trust assets when the initial trustees either become incapacitated and can't act or, they pass away. Finally, the Trustor will appoint final beneficiaries and of course they are the people who will benefit from the trust when after the death of the Trustors. A married couple will usually act as co-trustors, co-trustees, and co-beneficiaries. When the first trustor dies, the survivor will continue to act as the surviving trustor, surviving trustee, and surviving beneficiary. When the survivor dies, the successor trustee gains authority and follows the instructions of the trust to finalize the estate and transfer assets to the final beneficiary.

This is how a trust commonly works and is arranged, but there are other variations which could happen. There are simply too many variations to list here.

A Testamentary Trust is created during a person's lifetime, usually through a Will. However, the trust does not become active nor are assets transferred into the trust until after the creator's death. This means that all assets which will be placed in the Testamentary trust will remain titled in the name of the creator. Therefore, at death, the assets must go through probate before they are placed in the trust.

Two more terms commonly used when discussing trusts are, "a revocable trust" and an "Irrevocable Trust." Both trusts are "living" or "inter vivos" trusts. This means they are both created and operated during a person's lifetime. A revocable trust will include provisions written into the trust which will allow the Trustor to make changes and even cancel the entire document (revoke the trust). Should this be done, the assets that were titled in the name of the trust would be re-titled back into the name of individual. The exception to this flexibility is that in the event the creator dies or becomes incompetent, most revocable trusts will have a provision which makes the trust irrevocable and unchangeable.

An irrevocable trust simply means that the Trustor cannot cancel (revoke) the trust by himself/herself. Initially it may seem that this form of trust is quite restrictive and even undesirable but that is rarely the case. This form of trust is powerful and when properly drafted, most people wishing to own a trust will choose this form once they understand the facts.

A common belief or question from people unfamiliar with trust documents is, "If I create a trust, will I lose control of my assets?" Of course, the answer is NO! If a trust is properly drafted, your financial decisions concerning your assets will not change from how you made those decisions before you had a trust. As the creator of the trust, a trustor will rarely appoint anyone other than themselves to act as trustee (the person who manages the assets titled in the trust).

Frequently Asked Questions...

Will a Trust avoid income taxes?

No. In most cases a trust will operate under the creator's personal social security number so any income earned by a trust investment will be reported on that individual's form 1040. Taxes paid in the same manner and at the same rate that taxes would be paid had the trust never been created.

I have a modest sized estate. Does it make sense for me to create an estate plan?

Every estate is different, and the owners of those estates can have different goals. However, the goals or the reasons why people choose to create a trust are common goals for most families no matter what the size of their estate. So, the safest answer is, you should assume owning a trust will benefit you greatly until there is solid evidence that a trust will not benefit your family. No matter what the size of the estate, most families believe their assets are precious to the individual. Most want to keep their assets as long as they live and then pass them to loved ones without cost or interference. Some form of trusts will give you the best chance of making that happen.

How are Trust assets invested?

In most cases money is invested in the same manner it was invested prior to the existence of the trust. The trustee will manage investments and oversee the process. Trust assets are held in bank accounts, brokerage accounts, in annuities through insurance companies, etc. The intent of holding these assets in the trust rather than in the name of the individual is simply to avoid probate and many of the other negative issues that the trust creator wishes to avoid. One of the greater benefits of placing investments into the correct form of trust is to shelter them from being lost to nursing homes in the event long-term care is needed later in life.

How does one choose a Trustee?

A trustee is the person who will manage and care for trust assets. When a family trust is created, it is almost always the case that the trust's creator will appoint himself/herself to be the trustee of their trust. In the case of a husband and wife creating a trust together, they will both appoint themselves to be co-trustees. The creator will also appoint successor trustees so when the initial trustees either become incapacitated or die, there is someone who is already appointed to step up and take over the operations of trust assets. This individual must be able to follow your wishes, treat your beneficiaries fairly, be organized and understand money and investments. Of course, you should trust the individual(s) completely.