In its most basic, a trust is a relationship whereby property is held by one party for the benefit of another. A trust is created by a Settlor, also referred to as a Grantor or Maker, who transfers property to a Trustee. The Trustee holds that property for the trust’s beneficiaries. The beneficiaries may be current and/or future beneficiaries. Although you never have thought about it, you likely enter into trust agreements on a regular basis. Imagine, for example, that you ask your sister to hold onto your valuable collection of Barbie dolls until your niece is old enough for them at which time you want her to have them. In that scenario, you have created a trust agreement wherein you are the Settlor, your sister is the Trustee, and your niece is the beneficiary of the trust.
All trusts fit into one of two categories – testamentary or living trust. A testamentary trust is one that does not become active until the death of the Settlor. Typically, a testamentary trust is triggered by a provision in the Settlor’s Last Will and Testament. A living trust, formally known as a “inter-vivos” trust, activates as soon as all of the formalities of creation are complete and the trust is funded.
Living trusts can be further divided into irrevocable and revocable living trusts. A revocable living trust is one that can be modified, terminated or revoked at any time and for any reason by the Settlor. An irrevocable living trust, on the other hand, is one that cannot be modified, terminated, or revoked by the Settlor for any reason once it has been activated. A testamentary trust is always revocable because it is activated by a provision in the Settlor’s Will and the Will can always be changed up to the point of the death of the Testator. An irrevocable trust has the advantage of placing assets outside of the reach of creditors or other threats to the assets because once the assets are transferred into the trust they become trust assets.
The Trustee of a trust administers the trust which requires the Trustee to take on a wide range of duties and responsibilities, including:
- Following all trust terms unless they are illegal or unconscionable.
- Communicating with beneficiaries.
- Investing trust assets using the “prudent investor” standard.
- Managing trust assets.
- Distributing trust assets.
- Keeping trust records.
- Preparing and filing trust taxes.
- Defending the trust against legal challenges.
One of the most common mistakes Settlors make when creating a trust is to appoint someone close to them, such as a spouse or friend, as the Trustee of their trust without taking to time to contemplate the individual’s suitability for the job. Ideally, your Trustee should have experience in the legal and/or financial field because many of the Trustee duties require a knowledge of law and finance. Instead of simply appointing someone you “trust” as your Trustee, appoint someone who can administer the trust efficiently and economically. You may even wish to consider appointing a professional Trustee.
In today’s electronic age it is tempting to use the internet for everything – even locating estate planning legal forms. Before you succumb to temptation, take a minute to contemplate the likely results of using a DIY trust agreement for your trust. Without the advice of an experienced estate planning attorney during the drafting of your trust agreement, the likelihood of you ending up with an agreement full of errors and omissions increases considerably. Even a relatively minor mistake in a trust agreement can lead to a complete failure of the entire agreement and may put the trust assets at risk.
The flexible nature of a trust makes it an excellent estate planning tool to help with a wide range of estate planning goals, including:
- Incapacity planning
- Probate avoidance
- Medicaid planning
- Charitable gifting
- Planning for parents with minor children
- Special needs planning
- Tax avoidance