Trusts are one of the most versatile items of the financial planning toolkit. But, they are not just for rich people. With the new higher estate tax exemptions avoiding or reducing estate tax is not a concern for most of us. But, there is so much more trusts can do to solve critical problems for most families.
Trusts are a key building block of a proper estate plan. But, today, let’s just explore the simplest type of trust and the benefits that you might enjoy during your lifetime.
What is a trust?
First let’s examine what trusts are. We have had trusts for almost 1000 years since the English knights rode off to the Crusades and left their property in the hands of trusted individuals to manage during their absence. And key concepts go back another thousand years. Beginning in the 12th century a large body of English common law evolved all of which was later adopted by the colonies when they declared independence.
Trusts are a unique concept evolved from English common law. Countries based on civil law don’t have them and have struggled to provide alternative vehicles with comparable utility.
Lawyers love to explain that trusts are not entities like persons or corporations. That’s a distinction without meaning for most of us. Who cares? The less said about that the better.
There are three parties to a trust: The owner of some property (settler or grantor) turns it over to a trusted person or organization (trustee) under a trust arrangement to hold and manage for the benefit of a person or persons (beneficiaries). Normally a written trust document (the trust) sets out the terms of the arrangement.
Trusts can hold many different kinds of assets including but not limited to stocks, bonds, homes and other real estate, business interests, and art work.
The Revocable Trust
One of the most useful trusts for many of our clients is a revocable trust (inter vivos) where the grantor creates a trust, funds it, manages it by him or herself, and has unrestricted rights to the trust assets (corpus).
The client has the right at any time to revoke the trust by simply tearing up the document and reclaiming the assets, or perhaps amend the document to accomplish alternative financial planning goals.
You don’t need a trust company or bank as trustee. You just draw up a trust document and re-title some property to the trust. Life goes on pretty much like it did before. You give up nothing in the way of rights, and you remain captain of your own ship.
Assets transferred to a revocable trust are not a gift. They can be reclaimed at any time. You have unrestricted rights to the property. But, during your life the trust gives you a very useful shell to provide management if and when needed.
OK, I get it. It sounds pretty strange until we start looking at the potential lifetime and estate planning benefits that can be incorporated into the trust:
If the grantor is unable or uninterested in managing the trust, the grantor can hire an investment advisor to manage the account in one of the major discount brokerages like Schwab, TD Ameritrade or Fidelity.
Or, for an additional charge the donor can appoint a trust company to act for him/herself. Trust company professionals provide administrative, investment, accounting, legal and tax management for the beneficiaries.
During any incapacity, a trusted spouse, child, personal friend or other person (contingent trustee) can be appointed to step in to care for and represent the needs of the grantor/beneficiary. That person will manage your assets during your incapacity and take care of you without having to declare you incompetent and invoke a guardianship. Upon recovery you can resume your duties as trustee.
Guardianship is a nightmare legal proceeding that makes you a ward of the state. It’s expensive, public, humiliating, restrictive, and burdensome. You don’t want to go there. A well drafted trust (along with powers of appointment) avoids that problem.
If you are a member of the sandwich generation, trusts may be a convenient way for you to manages assets for your parents, in-laws, and/or children. Your parents may need and/or appreciate the help, and the trust gives you a structure to provide for them. Again, this heads off any potential need for a guardianship.
As the key provision of an estate plan
The revocable trust is an invaluable tool for estate planning. Bypassing probate is a primary benefit.
Importantly, when the grantor of the trust dies property held by the trust bypasses probate. This should result in considerable reduction of cost, aggravation and time.
The estate will still have to be settled, but you won’t be charged for collecting and distributing the property in the trust. Trust property, along with insurance proceeds, jointly titled property, and some other assets are excluded from probate. Preplanning pays off big time.
Even reasonably simple revocable trusts often form the basis for more complex advanced estate planning. The uses are almost endless.
It goes without saying that a proper estate plan will also include wills, powers of appointment, medical directives and other considerations. That’s beyond this discussion.
Part two will provide a few examples of how trusts routinely solve common family problems as property passes to future generations.
As always, don’t try this at home. Any trust should be created by a very competent attorney after much thought about what you wish to accomplish.