You’ve thought about it. You’ve talked to your friends and family members about it. Maybe it’s time to do it.
Simply put, a trust is a contract between 3 parties with 3 distinct roles:
The grantor (aka “Trustor”) is the creator of the trust. The grantor’s role is to 1) decide on the rules or “terms” of the trust and 2) donate or “grant” the trust property to the trust. A trust can have one grantor or multiple grantors.
We like to refer to the grantor as the “legislative” branch of the trust because the grantor makes the rules.
The trustee’s primary role is to enforce the rules of the trust and carry out the grantor’s wishes. A trust can have one trustee or a board of co-trustees.
We like to refer to the trustee as the “executive” branch of the trust because the trustee enforces the rules.
The beneficiary has the best job of all – to enjoy the property and benefits of the trust according to the terms of the trust. A trust can have one beneficiary or many.
We like to refer to the beneficiary as the “citizen” of the trust because the beneficiary enjoys the benefits of the trust.
Makes the rules, donates the property.
Enforces the rules.
Enjoys the property.
There are different types of trusts. A Revocable Living Trust (aka Living Trust or Family Trust) is a specific type of trust structured like this:
YOU are the grantor, so you create the trust and donate the property.
YOU are the trustee (while you’re alive), so you enforce your own rules.
YOU are the beneficiary (while you’re alive), so you get to continue to enjoy your own property.
YOU TWO are the grantors, so you both create the trust and donate the property.
YOU TWO are the trustees (while you’re alive), so you both enforce your own rules.
YOU TWO are the beneficiaries (while you’re alive), so you both get to continue to enjoy your own property.
Since you are serving in all 3 roles, this means:
You have full access to the income, principal and enjoyment of trust property without restriction just as you did before you created the trust.
You can invest, sell and otherwise manage trust property without restriction just as you did before you created the trust.
Your Living Trust is a “disregarded entity” for tax purposes so there is no additional tax reporting. You report taxes as before you created the trust.
You can contribute to the trust your property that was acquired before you created the trust and property acquired after creating the trust.
You can change, amend or terminate the trust at anytime without restriction. This is why it is called a Revocable Living Trust.
What will the Living Trust do for You?
Your Living Trust will Achieve 4 Primary Objectives:
When you transfer your property to a Living Trust, you technically no longer own it – your trust does. So when you die, you don’t have an “estate” and your heirs don’t have to go to probate court to obtain ownership of your property.
Avoiding probate saves your loved ones the trouble, expense and time of a costly, time-consuming court proceeding that could invite conflict into the family.
Keep Control in the Family
You choose who will serve as successor trustee(s) of your Living Trust after your death. Clients typically name children, extended family members or a trusted friend or advisor to serve as trustee or as co-trustees. Your choice can be changed anytime during your lifetime while you have mental capacity.
Your trustee is in charge of carrying out your instructions in the trust with regard to management and distribution of trust property.
A trustee has authority to invest and sell trust property and to make distributions to beneficiaries as you instruct in your trust.
Your trustee operates independent of the court system but is a fiduciary. This means the trustee has legal accountability to the beneficiaries of the trust and can be held responsible if they commit fraud or otherwise abuse their authority.
In most cases, your beneficiaries (aka “heirs”) will be well into adulthood at the time of your death. We typically write our clients’ trusts so that trust property is distributed to beneficiaries shortly after your passing in the % you decided on.
It is possible however that a beneficiary well into adulthood may be dealing with a crisis event like creditor issues, substance abuse or a gambling addiction. Most clients don’t want trust funds to be used to fund a beneficiary’s self-destructive behavior.
A well drafted Living Trust will give the trustee discretion to hold the beneficiary’s share in trust until the crisis passes. A trustee can also use the beneficiary’s share to pay expenses on the beneficiary’s behalf – for example, medical and rehab facility expenses.
If a beneficiary has special needs, the trust contains language allowing the trustee to keep the beneficiary’s share in trust so as not to disqualify them from receiving disability benefits. Limited trust funds may be used to supplement those benefits.
It’s possible that you may have young adults among your heirs at the time of your passing. Most of our clients are uneasy with the idea of an 18 year old receiving their share of the trust in one lump sum.
A Living Trust also anticipates the possibility of a beneficiary passing early in life before their share has been distributed from the trust. Your trust will list contingent beneficiaries – for example, grandchildren – to inherit the share of a beneficiary who dies prematurely.
When a couple transfers their property to a Living Trust and one of them dies, the surviving spouse is the sole trustee of the trust.
As sole trustee they have full control over trust assets. They can access both income and principal of the trust for any personal wants or needs. They decide how trust assets are invested and can sell assets of the trust.
If the surviving spouse remarries, trust assets are separate from the new spouse and their children. If there is a divorce from the new spouse, they have no claim to trust property.
If the surviving spouse becomes incapacitated or wants to pass trustee responsibilities to the next generation, the successor trustee (usually one or more of the children) easily steps in and continues managing the trust for the benefit of the surviving spouse through the end of their life.
So now that you better understand what a Living Trust is and how it benefits you and your loved ones, give us a call to talk about it! It costs you nothing to meet with us and we would enjoy talking with you! Call us at 1-800-674-3582 or send an email to firstname.lastname@example.org.