We are often asked, do I need a trust? Our standard answer is, it depends, what are you trying to accomplish? There are many reasons that a trust may be necessary or may be desired. Irrevocable versus revocable trusts have different purposes. Special needs, testamentary, spendthrift, medical expense, life insurance, and charitable remainder trusts – to name a few, all meet different needs.
Trusts are a separate entity from the individual who created them. The trust then owns any asset whose title or registration is changed to the trust’s name. Depending on the type of trust, the assets being titled to the trust then have certain protections. Changing the deed of a property to the name of a trust means the trust owns it. The same is true if the owner of a life insurance policy changes to the trust or if a brokerage account is registered in the name of the trust.
A trust document is created, generally by an attorney. This legal document explains how the trust will work. The grantor is the person who creates the trust. This usually is the person who is transferring assets to the trust. The grantor selects one or more trustees. The trustee(s) is the one who manages the trust. The grantor selects the beneficiaries. The beneficiaries are the person(people) who receive the trust assets when the conditions in the trust are met.
The grantor can select a family member or a friend to be the trustee. The decision may be made to use a corporate trustee, often a trust department in a bank or other financial institution. In some types of trusts, the grantor themselves can also act as the trustee. With more than one trustee, the grantor can decide if the trustees can act independently or if all must act together when making decisions or performing activities. The trustee would be the one responsible for paying any bills of the trust. This person would file the tax returns required. Part of the trustee’s responsibilities might be investing or working with a financial planner making the investment decisions.
Frequently within the trust, there are stipulations as to how distributions from the trust are to be made. It would be the responsibility of the trustee to make sure those wishes are followed. It would be the trustee who determines if distributions are within the terms of the trust. Some trust documents will give a lot of autonomy to the trustee to make those decisions. Other trust documents are more specific regarding any distributions.
The trustee carries out what the grantor requested in the trust document. When considering who you want to be the trustee, make sure you consider if the person can handle the job. You will want someone who is financially savvy and organized enough to manage the assets. Once all assets within the trust have been disbursed, the trustee will close out the trust. A trustee can receive payment for providing these services. We often see family members or friends waiving that payment while corporate trustees expect to get paid for their services.
The beneficiaries of a trust are similar to the beneficiaries of other types of assets. You can name one or more to get whatever percentages of the assets that you wish. The terms within the trust dictate when the beneficiary(ies) receives the assets. It may be at the death of the grantor. It may be when a child reaches the age of majority, age 18 or age 21. It may be when a condition is met – a child gets married or a grandchild reaches age 25. Maybe the trust states that there will be a monthly income distribution for 15 years or until a certain age is reached. The grantor, when they created the trust, determines under what conditions the assets can be distributed.
One difference between the beneficiary of a trust and other types of accounts with beneficiaries is that you can have different types of beneficiaries. An income beneficiary receives the income from the trust’s investments, at least annually. This individual(s) has no right to the principal of the trust; they only have access to the income. We sometimes see this when children may be wealthy enough in their own right that they do not need their parents’ assets. The parents will provide the income to their children with no access to the principal to potentially minimize estate taxes.
In this type of trust, the second type of beneficiary is the residual beneficiary. Once the income beneficiary has died, the residual beneficiary has access to the entire principal amount in the trust, and often the trust is liquidated and closed.
One of the conditions of a trust is they must end. Trusts are not meant to exist forever. It is a requirement that a trust has a condition that creates the termination. This can be the death of the income beneficiary. This could be the death of the grantor. It could be the beneficiary reaching the age of majority. It could be the trust runs out of money if distributions are being made regularly.
Trusts are first classified as irrevocable or revocable. An irrevocable trust is one that cannot be reversed. Whatever assets you put into the trust, must stay in the trust. They can stay in the current form or be sold with the proceeds remaining in the trust. For example, consider if you put your primary residence into an irrevocable trust. The deed will reflect the trust name. If the house is sold, the proceeds must stay in the trust. The proceeds could be invested or the proceeds could purchase a new house. Since the proceeds must stay in the trust, this could be problematic if an individual is now going to rent new living quarters rather than purchase. The proceeds are not available to pay rent.
Assets in the irrevocable trust are no longer consider assets of the individual. The grantor does not have control of those assets. The grantor is not allowed to be the trustee of an irrevocable trust. The trustee now manages those assets. An irrevocable trust does provide a level of protection for the grantor. The assets in the trust are protected against needing to be cashed in to pay for long term care expenses and can be protected against creditors’ claims. This protection is not immediate; there is a period of time while the assets gradually become protected.
A revocable trust is just the opposite. The grantor can elect to retain control of the assets by being the trustee. Any assets placed in the trust can be reversed and taken back out of the trust. We often see a revocable trust being created to avoid probate at the death of the grantor. While probate is a public process, the settlement of a trust is a private process. A revocable trust does not provide long term care or creditor protection since the grantor still has access to the trust assets.
Check out our August 6th post for more information about the different types of trust.