A “Trust” is a legal entity created by a settlor (also known as a grantor) that owns or “holds” assets under the authority of a person, called the Trustee, for the benefit of a third person, who is called the beneficiary.
For a Revocable Living Trust – the type of Trust you will be creating – it is common for you to be both the settlor (the person that creates and funds the Trust) and the Trustee in charge of the Trust. Generally, it is easy to create a Trust; the challenge is in funding it because you have to transfer assets you own into the Trust.
In this post, we’ll be discussing the common questions associated with Trusts and how to create one.
How and why would you move from a will-based estate plan to a trust-based estate plan?
For the vast majority of Americans a will based estate plan is sufficient. In 2020, the estate tax exemption is over 11 million dollars which means that if you have assets valued at less than 11 million dollars, there is no estate tax. Many states follow the federal estate tax exemption. Some however, do not. So if you live in a state that has a low estate tax exemption and you have assets over that threshold, than you may want to transfer assets into a trust. Other considerations are that a will must be probated in court, which is a public record and for the most part, trusts are private and have no court involvement. Some argue that the probate process takes along time. Again, depending upon your assets and your jurisdiction, probate is not a long or expensive process.
What is a Settlor?
The “settlor” or grantor of the Trust is the person creating the Trust and transferring assets into it.
What is a Trustee?
A Trustee manages the Trust and controls the Trust assets. A Trustee has broad powers to manage the assets, including in some cases, selling the Trust’s assets as described in the Trust. Be sure to choose Trustees that you personally trust.
Who should be my Trustee for my Revocable Living Trust?
Choosing the right Trustee depends on the type of Trust you are setting up and why you are setting it up.
Revocable Living Trusts are typically only used for estate planning purposes to avoid probate, so you should generally be the Trustee.
You should also appoint alternate Trustees that can serve in case your primary Trustee becomes incapacitated. Alternate Trustees can either be trusted friends or relatives, or neutral third parties like your bank or financial advisor (keep in mind, third parties will typically charge a fee for this service).
Be aware that Trustees have powers to manage the Trust’s assets, including in some cases, selling the Trust’s assets. Be sure to choose Trustees that you personally trust and know to be responsible.
Is there any personal risk to me if I serve as a Trustee?
It depends on the Trust. For a Revocable Living Trust, you generally only owe a fiduciary duty to the settlor. A fiduciary duty is an obligation to act in the settlor’s best interest. If you are both the settlor and the Trustee, there is no risk of personal liability to you.
Trustees have a fiduciary responsibility to manage the Trust’s assets with reasonable care. A Trustee who mismanages the Trust’s assets could be personally liable to the settlor or the beneficiaries for any losses they incur. If you serve as Trustee for someone else’s Trust, you bear those responsibilities.
What does "fiduciary responsibility" mean?
A fiduciary describes a person in a position of trust who has some power or control over another person. The fiduciary’s responsibility is to always act in the best interest of the other person.
Why do I need alternate Trustees?
If your Trust does not have a Trustee or an alternate that is able or willing to serve, the court will have to step in and appoint a Trustee for you.
There are many reasons a Trustee may not be able to serve: death, incapacity, inconvenience, or remoteness. You should always have alternate Trustee choices. As a fail-safe, you can always list a neutral third-party person or institution, like your bank or financial advisor. These third-parties often provide Trustee services, though they will usually charge a fee for this service.
What should I name my Trust?
The name of your Trust will appear on legal documents, including the title of any assets that you place into the Trust. You can name your Trust whatever you want. Some people choose their family name, while others choose something more generic. “The John Doe Living Trust,” for example, is a common naming structure for this type of Trust. If you value privacy, you might want to choose something that doesn’t include your family name, such as “The Apple Street Living Trust.”
How do I fund my Trust?
The creation of the Trust document is just the beginning of the Trust process. After the Trust is created you need to fund it with whatever assets you want to be held in Trust. Simply creating the Trust does not fund the Trust, you need to transfer assets into the Trust. How you transfer those assets depends upon the type of asset. For example, for a bank account that is in your name individually, you need to go to the bank and transfer the account from your name to the Trust’s name. For real estate, you would need a deed to transfer the property from your name to the name of the Trust and the deed would need to be recorded at the Registry of Deed’s or your state’s equivalent.
You will need to re-title your assets – such as your real estate or your car/s – in the name of your Trust. You should also name your Trust as the beneficiary on any payable retirement or other financial accounts, such as your life insurance or 401k.
What happens if I don't fund my Trust?
If you don’t fund your Trust (for example, if you do not re-title your assets in the name of your Trust), your Trust will be ineffective.
Your Trust only has authority over the assets that are placed (or “funded”) into it. Any assets outside of your Trust will be subject to your Will, if you have one. If you have a “Pour-over Will” like the one we help you create, it makes sure any assets you don’t put into your Trust during your lifetime transfer into the Trust upon your death.
Can an asset be removed from the Trust?
It depends upon the language in the Trust. Generally, The Trustee has broad authority to control and transfer assets.
What is Probate? And why is it bad?
Probate is a legal term that describes the process of when a Will is presented to the court to be allowed. The Personal Representative petitions the court to allow the Will and all its terms, including the appointment of a Personal Representative and a Guardian, if applicable. Since it involves the court, it is a public proceeding and depending upon your state it may be costly and time consuming process. For most Americans, with a simple estate, the probate process is not expensive or time consuming. Probate is neither good nor bad. Its efficiency depends upon your particular circumstances. If you guard your privacy above all other considerations, a Trust based estate plan may be better for you because generally, Trust documents are kept private unless there is a lawsuit involving the Trust.