A trust agreement is among the most popular additions to the average estate plan. If you are contemplating the addition of a trust to your estate plan, you probably have several questions about trusts and about the benefits of establishing one. You may also be concerned about your ability to control assets after they are transferred into a trust. To help you better understand how a trust fits into your estate plan, the Indianapolis trust attorneys at Frank & Kraft discuss whether you will still have control over assets transferred into a trust.
Trust Basics
A trust is established through the creation of a legal document called a trust agreement. The basic concept behind a trust is a legal relationship that allows the Settlor (the creator of the trust) to designate a Trustee to protect and manage assets intended to benefit a third-party beneficiary (or beneficiaries). A trust that is created and administered during the lifetime of the Settlor is referred to as a living trust while a testamentary trust is created through a provision in the Settlor’s Last Will and Testament and is not administered until after the death of the Settlor. Living trust can be revocable or irrevocable, a distinction that is important when discussing the ability to control trust assets. Because the Settlor of the trust is no longer alive, a testamentary trust is always considered irrevocable once activated.
Understanding Control Over Trust Assets
A trust can be funded using almost any type of assets, including cash, real property, securities, life insurance proceeds, and almost anything else of value. Once an asset has been transferred into a trust, the asset becomes the property of the trust. Before you create a trust and transfer assets into the trust, you need to have a firm understanding of your ability to continue to control assets held by the trust. That ability, or lack thereof, will depend primarily on the type of trust involved and whether you are the Trustee of the trust.
With a revocable living trust, the Settlor of the trust retains the ability to modify or revoke the trust at any time. That includes the ability to transfer assets into or out of the trust. As the Settlor, you can always remove an asset from the trust if you want to re-exert control over the asset. Trust assets are managed and controlled by the Trustee of the trust. Sometimes, the Settlor is also the Trustee. This is a common scenario when a revocable living trust is created as part of an overall incapacity plan. If you named yourself as the Trustee of the trust, you would retain control over the trust assets without the need to transfer them out of the trust.
Conversely, as the Settlor of an irrevocable living trust you retain no control over assets transferred into the trust and no ability to transfer the assets back out of the trust. The inability to control assets held in an irrevocable trust is precisely why these trusts are used for asset protection. The trust itself is a separate legal entity and because the trust is irrevocable, assets transferred into become trust property and are controlled by the Trustee of the trust. While it is legally possible to name yourself as the Trustee of an irrevocable trust, doing so would result in the loss of the asset protection benefits offered by such trusts. In practice, therefore, you would not be the Trustee of an irrevocable trust created by you and assets transferred into the trust remain out of your control.
With a testamentary trust, you retain the ability to revoke or modify the terms of the trust up to your death at which time the trust activates and effectively becomes an irrevocable trust.
Are You Interested in Creating a Trust?
For more information, please join us for an upcoming FREE seminar. If you are interested in incorporating a trust into your estate plan, contact the experienced Indianapolis trust attorneys at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.
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