12/11/2014

Estate Planning 101: What is a Trust?

By Cooley A. Arroyo

Like a will, a trust may be used to determine “who gets what” from a person’s estate, but a trust is a more dynamic and flexible document that can be used to further a person’s wishes. Unlike a will, which takes effect after the testator’s death, a trust can be used to manage a person’s assets during life and then direct distributions to loved ones upon death. Trusts can be created to further charitable purposes, hold life insurance policies, or provide for a child with special needs.

Simply put, a trust is a very versatile estate planning tool, but its basic components are easily grasped. There are three key players in a trust:
  • The settlor, who creates the trust;
  • The trustee, who is appointed by the settlor to administer and manage the trust; and
  • The beneficiary, who ultimately receives the trust property.
Upon creating the trust, the settlor transfers her property to the trustee of the trust. Often, the settlor also serves as the trustee. Property that is transferred to the trust may include houses, cars, bank accounts, and even everyday items like furniture and appliances. The settlor instructs the trustee to make distributions in furtherance of a certain purpose, and the trustee holds legal title and manages the property for the benefit of the beneficiaries. The trustee will only make distributions from the trust property when it is for the benefit of the beneficiaries. The trustee has a legal obligation and fiduciary duty to carry out this role and make distributions according to the terms of the trust. A trust is also a good option for beneficiaries who might need help managing their funds (e.g., minor children or beneficiaries with spending issues).

To illustrate this concept in action, consider the following example:
Jenna is 75 years old and suffers from poor health. She has an extensive estate that includes two homes and a savings account holding over $200,000. She has ten grandchildren who are under the age of twenty. Jenna would like to provide for the children’s education, but she worries they might squander their inheritance before they graduate from high school.

Jenna can create a trust that provides for the education of her grandchildren; after transferring the title to her homes and other property to the trust, the trustee will manage the property for the benefit of her grandchildren and their education. Jenna could serve as the trustee and appoint another person to take over for her after she dies. This is a good option because it gives Jenna additional control over the estate while also ensuring that a responsible person makes distributions that further her wishes.
A trust also provides a veil of privacy for the settlor; a will becomes a public record after it is filed with the court, but a trust remains a private document. Trusts can be created in a number of ways and for many purposes, but clients often choose to establish a trust for probate avoidance or estate tax mitigation. There is not a “one size fits all” rule regarding whether a will, trust, or other estate planning tool is right for a particular person’s needs.

Please contact me or any of the other estate planning attorneys at Cleveland, Waters and Bass to discuss this option and learn whether a trust might complement your existing estate plan.

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