Trusts

What is a Trust?

A trust is created by a written agreement between the individual creating the trust (known as a "grantor") and a person or institution (known as the "trustee"). The grantor gives the right to manage and control the property placed in the trust to the individual or institution. The trust document provides:

The trustee the legal right to manage and control property
Identifies the persons or institutions ("beneficiaries") who will receive income or principal
Guides the trustee in the management and distribution of the trust property

The trustee must be someone in whom the grantor has trust and confidence. Without the grantor's express written permission, the trustee cannot use the assets in the trust for personal benefit, but may only act in the interests of the designated beneficiaries of the trust.

Many types of trusts are used. They include:

Revocable trusts (also known as "living trusts")
Life insurance trusts
Charitable trusts
Trusts for minor children and disabled adults (Special Needs Trusts)

What Is A Revocable Inter Vivos (or "Living Trust")

A revocable living trust is a written document that is established with you as the grantor of the trust and usually with you as the trustee of the trust as well. This type of trust serves two purposes:

It contains your instructions for the management of assets if you become disabled
It avoids probate. Although it gives your instructions for distribution of assets after death, you will also need a will known as a "pourover" will. The name of this type of will comes from the fact that any assets that go through the probate process "pour into" the trust after death.

If the purpose of avoiding probate is to be met, after the trust is created, it is VERY IMPORTANT to change the title to your assets into the name of the trust or the work which has gone into establishing the trust is wasted. Some individuals can take care of most of the changes of title without an attorney. Real property is transferred into the trust by a deed.

A revocable trust will not affect your income taxes as long as you remain the trustee of your own trust. However, if you become unable to act as your own trustee, and another person occupies that position, the trust must obtain its own version of a social security number, called a "tax identification number" and file a seperate tax return. The income you receive from the trust is reported on a Form K-1 and is also reported on your personal tax return. Also, contrary to a widely held misconception, you will not save estate taxes with a revocable trust!

A revokable living trust has both advantages and disadvantages. Some of the advantages are:

Assets do not go through probate and can be distributed more quickly and with less cost than probate
A trust helps to keep your affairs more private than with a Will
It may make it more difficult for someone to challenge the disposition of your estate
If you own real property in more than one state you may avoid probate proceedings in each state
Management of your estate by the person of your choice continues, on your terms, without Court intervention

Some of the disadvantages are:

Sometimes probate is desirable to avoid long term exposure to creditors
Costs to create a trust are more than a Will
Placing your assets in a trust requires your time and/or the assistance of counsel and some assets are difficult to transfer
If you transfer your residence to the trust it may make refinancing more difficult
Potential abuse, mismanagement and/or fraud by the trustee will be more difficult to detect due to the private nature of a trust, including the failure to distribute assets after the grantors death due to lack of knowledge by the beneficiaries
Some assets are not well suited to being transferred to a revocable trust