What is a trust, anyway?
A “trust” is a legal relationship under which a “trustee” is entrusted with certain assets and is required to deal with those trust assets solely for the benefit of another person, the trust “beneficiary.” The person who creates the trust is called the “Trustor” or “Settlor.” There are at least as many different types of trusts as there are different makes of automobiles, so it’s important to recognize that not all trusts are intended to serve the same purpose.
Trusts are incredibly useful estate planning tools. There are trusts which take advantage of particular provisions of the United States tax code related to income, gift, estate and generation-skipping taxes. There are trusts which are intended to benefit the trustor’s children or other family members during childhood. Trusts can safeguard assets from beneficiaries who have trouble holding onto money, or protect assets from their creditors.
Trusts are categorized as testamentary or living trusts, and as revocable or irrevocable trusts. A trust is a testamentary trust if it is created in the trustor’s will. Since it is contained in the trustor’s will, it can only come into existence after the trustor dies. Trusts which are created to operate during the Trustor’s lifetime are generally referred to as “living” or “inter vivos” trusts. Revocable trusts are trusts which can be amended or revoked by the Trustor, whereas irrevocable trusts generally can’t be changed or revoked. Trusts can also be distinguished by whether the purpose is a private or charitable purpose.
There are many types of sophisticated irrevocable trusts which address very specific estate planning goals. However, most popular discussions these days center around the “revocable living trust” for the benefit of the trustor.
Revocable Living Trusts
In a revocable living trust, a trustor transfers certain assets to a trustee and reserves the right to change or revoke the trust at any time. The trustee is responsible for managing, preserving and distributing the trust assets as directed by the trustor for the benefit of the beneficiary, who in this case, just happens to be the trustor. If the trustor becomes incompetent or disabled, the trustee continues to manage and distribute the trust’s assets for the trustor’s benefit. When the trustor dies, the trustee is directed to distribute the trust assets to those persons the Trustor has directed in the living trust.
Under certain circumstances, this distribution can take place several months sooner than it could under the deceased trustor’s will, which needs to go through probate. The trustor can even serve as trustee of this trust while he is able to do so, naminga successor trustee to serve if he becomes disabled or incompetent, or if he decides he wants someone else to manage the trust assets.
Revocable Living Trusts for the Trustor’s benefit serve at least two primary functions:
- They avoid probate; and
- Like powers of attorney, they provide a mechanism for the management and disbursement of the Trustor’s trust assets, particularly if the Trustor becomes disabled or incompetent.
Living trusts probably result in a higher degree of accountability by the trustee for the prudent management and preservation of trust assets than would be true of an attorney-in-fact under a durable power of attorney. Where accountability is a significant concern, a living trust can be more desirable than a durable power of attorney, and far less costly than a guardianship. Among other things, recent legislation has also clarified the rights of trust beneficiaries to obtain accountings from the trustee, extended certain rules regarding the capacity to make a will to apply to trusts, and introduced procedure modeled on those which are utilized in probate to close a trust once its administration has been completed.
Revocable Living Trusts can be very effective substitutes for wills. But trusts don’t work the same way as wills. Since they require a transfer of assets to the trustee, they can be frustrated if the assets the trustor intends to place in the trust are not appropriately placed in the trust. For this and other reasons, living trusts generally require a bit more attention and monitoring during the Trustor’s lifetime than would a traditional will.