When we analyze our estate planning goals, we find that we can accomplish many of them through the use of basic estate planning documents. But for some more complex goals, we need to go past the basic estate planning documents and use more complicated estate planning techniques and documents. The most common of these more complex techniques is the use of trusts. Trusts are very valuable tools because of their flexibility. A well drafted trust can work with the contours of the law to accomplish your goals as efficiently as possible. In this series of articles we will go through some of the more popular trusts used in estate planning and discuss who might use them, and what goals they can be used to accomplish. In this article we will go through the basics of what trusts are by defining some of the main terms associated with trusts.
A Trust is an artificial entity that a grantor creates through a trust document. By moving assets into a trust, you are able to change how the IRS, certain courts, and other government agencies treat these assets. Also, you can use the trust agreement to control the way that a trustee manages and distributes your assets in the future.
The Grantor/Settler/Trustor is the person who creates the trust and has a legal right to transfer property in and out of the trust. With some trusts, IRS taxes the trust as if it were the grantor.
A Trust Agreement is a legal document that creates a trust. This document details all of the trust specifics. The trust agreement names the beneficiaries of the trust, gives instructions on how to manage and distribute the trust assets, and explains what happens to the trust if the grantor becomes incapacitated or dies.
The Trustee is the person chosen to manage the property in the trust. The trustee is often the grantor of the trust, but it can also be another trusted person or corporate entity. The trustee manages the trust based on the instructions listed in the trust agreement. Additionally, the trustee owes the trust a high fiduciary duty. The trustee cannot make risky investments outside of those outlined in the trust agreement. If the trustee violates this duty, the courts could hold them personally liable for any trust losses.
A Successor trustee is a person or corporation who the grantor appoints to take over should the original trustee be unable to serve.
A Beneficiary of a trust is a person or organization who receives benefit from the trust. A trust can have multiple beneficiaries, and these beneficiaries can have different interests in the trust assets. For example, one beneficiary can receive trust assets while another receives the income from remaining trust assets.
The act of titling assets to the trust is called Funding the Trust. The grantor can do this at the formation of the trust, during the trust’s life, or upon the grantor’s death. If the trust is unfunded then it is of no value. One restriction on funding is that jointly held assets cannot be added to the trust until the joint ownership is severed.
The assets included in the trust is called the Property/Principal/Corpus.
A Living trust is a trust that the grantor creates during their life “inter-vivos”. This type of trust can be Revocable or Irrevocable.
A Revocable trust is a trust where the grantor of the trust can change the terms of the trust. This type of trust is valuable for controlling the trust assets and avoiding probate. Because the grantor maintains so much control of these assets, this type of trust is less valuable for minimizing taxes, for creditor protection and for becoming eligible for government benefits.
An Irrevocable trust is an inter-vivos trust where the trust terms cannot be changed. Because the trust terms cannot be changed, the law is more likely to respect the change in ownership of the assets. This makes irrevocable trusts more valuable for tax, creditor protection and government benefit purposes. These types of trust are often less popular because they require the grantor to give up control of the trust assets.
A Pour-over will is a will that is used in conjunction with a living trust. This type of will takes the assets that were outside of your trust and funnels them into your trust, so that the trustee can distribute those assets based on the terms of the trust.
A Testamentary trust is a trust that is created in your will. This type of trust can be used to extend your control over your assets after your death.