Attorneys, especially estate planning attorneys, talk about trusts all the time. They talk about them as if everyone already understands exactly what a trust is. There is no doubt that trusts have long served as a valuable estate and financial planning tool, since they can meet a number of important planning needs.
Since people began using trusts centuries ago, they have mistakenly been regarded as tools for the super-wealthy to protect their fortune. That is certainly true to a degree, but a person doesn’t have to be ‘filthy rich’ in order to benefit from the use of a trust.
Well then, what exactly is a trust? A trust may be defined as a “fiduciary relationship in which one person holds a property interest, subject to an equitable obligation to keep or use that interest for the benefit of another.”
A trust, then, is a legal entity, recognized and regulated by the laws of the various states, that is established by the proper execution of a formal, written document (the trust document) in which the legal ownership of certain property (the trust corpus or trust principal) held within the trust is separated from the beneficial ownership of the property itself. The person or institution who is the legal owner of the trust assets and who is responsible to manage and invest those assets is known as the trustee. Those persons who receive the benefits from the trust and/or income generated from trust assets are known as trust beneficiaries. That’s the attorney’s way of defining a trust.
A much simpler way to define or describe a trust is that it’s just a box. You put various types of assets into the box by re-titling the asset. The person who establishes or creates the box is the grantor, creator or trustor. Depending on the type of trust either the grantor or a third party puts the assets into the trust. The person (or people) that can control what happens to those assets, once in the box are the trustees. The trust document itself is what controls everything that was put into the box by defining what the trustees can and cannot do with those trust assets at any particular time.
The trustee must fulfill his duties as defined in the trust document in a fiduciary manner. A fiduciary standard of care is the highest level that is recognized by law. In essence, the trustee must put the interests of the trust and its various parties above his own interests. For example, the trustee may be obligated to use the trust principal for a primary beneficiary even though the trustee, as a secondary beneficiary, may end up with nothing left.
The provisions, purposes, duration, trustee powers and all other matters pertaining to the trust are contained in the trust document. The grantor must make a number of decisions prior to the establishment of the trust, such as:
- – What assets will be placed into the trust?
- – Who will receive the benefits from the trust?
- – Who will serve as the trustee?
- – How will the trust be operated and managed?
One of the great advantages of a trust is that it is a private agreement between the grantor and the trustee on how to handle the assets that were put into the trust. The agreement continues even after the death of the grantor. Therefore, if all the assets are in the trust, there is typically no need to go to court to probate a Will. This can be a major savings in cost and time. This also keeps the transfer of assets private and minimizes the risk of other parties attempting to contest the transfer of the assets.
The other purposes that may be served by the creation and proper administration of a trust include: reducing income and estate taxes, as well as managing wealth more effectively; ensuring that the trust assets will be professionally managed; protecting the assets against long term care costs or the inability to receive government benefits for disabled beneficiaries; the ability to “stand in” for children and grandchildren until they can become old enough or mature enough to handle their own affairs; ensuring that, at the death of the grantor, benefits will pass to the proper individuals, at the proper time, and in the proper amount.
The one caveat with trusts is that people forget that there are two parts to using a trust for any of the above purposes. The trust must be created and the trust must be funded. Many people forget to do the second part. Without that you just have an empty box. Assets must be re-titled into the name of the trust for the trust document to have any control over those assets. A qualified estate planning attorney can guide you through this process.