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 beneficiaries designated by the Settlor in the trust agreement. In daily life, trust agreements are entered into all the time without the parties even realizing it. For example, imagine that you need to be out of the country for several months but you also want to give some family heirlooms to your younger sister. You ask a friend to keep them safe until your sister is available to take them. The arrangement you set up is effectively a trust. You are the Settlor, your friend is the Trustee, and your younger sister is the beneficiary of the trust.
Trusts broadly divided into two categories – testamentary and living trusts. A testamentary trust is one that does not become active until the death of the Settlor and which is typically triggered by a provision in the Settlor’s Last Will and Testament. A living trust, also referred to as an “inter vivos” trust, activates when all formalities of creation are complete and the trust is funded.
Yes. Living trusts can be further divided into revocable and irrevocable living trusts. As the names imply, a revocable living trust can be revoked or terminated by the Settlor at any time and for any reason whereas an irrevocable living trust cannot be revoked or terminated by the Settlor after the trust becomes active.
In general, the Trustee is responsible for managing and investing the trust assets as well as administering the trust according to the trust terms. Some of the specific duties and responsibilities of a Trustee include:
- 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.
The Settlor of a trust can appoint anyone to be the Trustee; however, given the importance of the position, care should be taken when deciding who to appoint. If possible, you should appoint a Trustee who has experience in the legal and/or financial field because a Trustee will need at least a fundamental understanding of both. Although it is often tempting to appoint someone close to you as your Trustee, that person may not actually have the experience and/or skills needed to successful; administer the trust. Sometimes, appointing a professional Trustee is the best option.
A trust can help achieve a wide range of estate planning goals given the flexible nature of a trust. Some of the more common uses for a trust include:
- Avoiding probate
- Incapacity planning
- Asset protection
- Medicaid planning
- Planning for parents with minor children
- Special needs planning
- Pet planning
The document created by the Settlor during the creation of a trust is referred to as a trust agreement. Within the trust agreement are the terms, created by the Settlor, that dictate how the trust will operate. Trust administration refers to the Trustee’s job of overseeing the terms of the trust. As a general rule, the more complex and/or valuable the trust assets are, the more time consuming and complicated it is to administer the trust.
It can be tempting to use the internet for everything, including legal forms. Using a Do-it-Yourself (DIY) trust agreement form to create your trust, however, is not a good idea. 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 the entire agreement failing.
Whether you want to use a Will or a trust to distribute your estate is something that can truly only be decided after consulting with an experienced estate planning attorney; however, there are some common considerations when deciding whether a Will or a trust should be used. If your estate is small enough to qualify for small estate administration, and you do not have minor children (nor plan to have any in the near future), a simple Will may be all you really need. If, however, your estate is large enough that probate avoidance is a consideration and/or you do have minor children who will inherit from your estate, you may wish to consider relying on a living trust as your primary distribution tool within your estate plan.