People create trusts for different reasons. A person who creates a revocable living trust may do so because it allows her to avoid probate, which is the court process of settling the estate of someone who has died. Parents of young children may include a “just in case” trust in their wills, so that if the parents die when their children are still young, the children’s inheritance will be placed in trust until the children are old enough to manage the assets themselves. Spouses with children and large estates may create trusts for each other in order to minimize the estate tax paid to the government before their children receive their inheritance. These are just some of the many reasons for creating a trust.
No matter the reason for or type of trust, certain terms remain the same for all of them. A “settlor” is the person who creates the trust. A “trustee” is the person who manages trust assets. A “beneficiary” is the person for whom the benefit of the trust is intended. In addition, a trust will either be revocable or irrevocable. The settlor and/or trustee of a revocable trust may modify or revoke the trust fairly easily, according to the terms of the trust, while an irrevocable trust may not be modified or revoked at all, or except under limited circumstances outlined in the trust and/or in state law.
When a settlor creates a trust, the settlor creates a separate legal entity. After creating the trust by signing a legal document, the settlor transfers ownership of assets from the settlor’s name to the trust’s name. If the asset is real property, the settlor signs a deed conveying the real property to the trust. If the asset is a bank account, the settlor changes the owner of the account to the trust. If the asset is personal property, the settlor signs an assignment of the personal property to the trust. The duty of the trustee, who is named in the trust document, is to administer trust assets in accordance with the terms of the trust, for the benefit of the trust beneficiary.
The operation of a trust depends upon the trust purpose. A trust for the benefit of minor or disabled children often takes effect when both parents have died. The parents may have included language in their wills indicating that if they die before their children reach a certain age, the inheritance of the children will be kept in trust and managed by a trustee to provide for the support, care and education of the children until they reach a specific age. If the child is disabled, the trust may direct that the disabled child’s inheritance will remain in trust for the child’s lifetime.
When parents die without creating a trust for their children, it may be necessary for a probate court to appoint a conservator to manage the children’s inheritance. Although conservatorship is appropriate in some cases, it includes costs, complexity and ongoing court oversight that trusts do not.
Another common type of trust is known as a “revocable living trust.” A revocable living trust is an estate plan that addresses three distinct phases of a settlor’s life and death: First, the trust makes clear that while the settlor is alive and well, he or she will serve as trustee and manage trust assets for his or her own benefit. Second, if the settlor becomes ill or injured to the extent that he cannot manage his finances, the trust identifies who will take over as trustee, and directs the successor trustee how to manage trust assets. Third, the trust directs the successor trustee how to distribute remaining trust assets after the settlor dies. As long as the settlor understands the nature and consequences of his or her actions, he or she can cancel or change the revocable living trust.
In the right set of circumstances, a revocable living trust may be an appropriate estate plan. A revocable living trust can sometimes allow the estate of a deceased person to avoid the court probate process for settling estates. The probate process generates costs, delay and complexity, which some families prefer to avoid. In addition, if a deceased person owns real property in more than one state, a probate process may be necessary in each state before the real property may be distributed to beneficiaries.
However, a revocable living trust is not the appropriate estate plan for all people. A revocable living trust is a complex estate plan that will cost more in legal fees than a more basic estate plan. A revocable living trust must be properly funded in order to avoid the probate process, and trust administration generates its own costs and delays. In addition, creation of a revocable living trust is not a tax strategy. The assets of a revocable living trust are subject to federal and state death taxes in exactly the same way as the assets passing under the terms of a more simple estate plan.
Many people hear horror stories about the court probate process and are urged by friends and relatives to execute a trust. A trust is a complex legal document that can serve various purposes for various people. It is important to determine – on an individual basis – whether a trust is an appropriate estate plan. To learn more about trusts and probate and estate planning, contact an attorney who is knowledgeable about trust and estate planning matters.
Legal editor: Tim McNeil, January 2016