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Estate Planning Basics Part II: Trusts


When most people hear the word “Trust”, there is an assumption that it comes as part of a package deal with a silver spoon; however, this is not always the case. Trusts may be more relevant for your situation than you think.

For example, if you are a parent of minor children, drafting a trust agreement may be a prudent estate planning decision. For those couples who have assets they would like to leave to their children, a trust would outline at what age they are to receive them if both spouses pass away simultaneously. More importantly, the trust document would appoint who would be responsible for the management of these assets until your children have reached the age of majority.

While not applicable to everyone, these blog entries are meant to be educational in nature and appeal to a broad audience; therefore, before we start discussing trusts, I would first like to define the word “Trust” and how they are used in estate planning.

A trust agreement is a document outlining the rules you want followed for assets that are meant to be passed down to others at a predetermined point in time. This could be upon your death, when someone reaches a certain age, becomes disabled, etc. Most commonly, people draft a trust document to help reduce estate tax liability, protect the property within an estate, and to avoid the probate process.

Just like baking a cake, setting up a trust requires a certain list of ingredients, as well as an understanding of how those ingredients work together to reach a finished product. Below, I have listed some common ingredients baked into a trust, as well as more specific commentary surrounding those ingredients to allow you to have a better understanding of the process.

Ingredients of a Trust Agreement

The person setting up the trust: The person who establishes a trust for the benefit of another is legally referred to as the “grantor” or “settler”. Once this person decides they would like to establish a trust, they are the one who can choose when and how to fund the trust with money or property.

The purpose of the trust/specific kind of trust: In order to define the purpose of the trust, there needs to be a thorough understanding of your specific state planning objective. Different types of trusts are used to achieve a variety of results. The best way to know what type of trust might be right for you is to have a conversation with your wealth manager or estate planning attorney, as they will be able to ask the necessary questions to uncover you unique needs.

Assets to fund the trust: Once you draw up the trust agreement, you need to “fund” the trust. Unless you apply assets towards the trust (usually money, securities or property), the agreement is just a document. You are able to fund the trust by transferring assets from an existing taxable account or titling property in the name of the trust.

Who benefits from the trust: This part is very important, as the purpose of estate planning is to ensure your assets are passed down according to your wishes in the most efficient manner possible. This “person” (or persons) is referred to as a beneficiary. Keep in mind that the word person is in quotations because the beneficiary can be natural person, a foundation or charity.

Who is in charge of managing the trust’s assets: Other than making sure your assets get passed down to the proper beneficiary, appointing a competent manager is the next most important thing when formulating a trust. This “person” (or persons) is called the “trustee” and is responsible for the management of the assets within the trust. As mentioned previously, in this context, a “person” can be a legal individual or an investment advisor (like a trust company). The trustee should have a good relationship with the beneficiaries, and be comfortable managing finances. If you do not feel confident in your trustee’s ability to perform these duties, it can be worthwhile to seek out the professional services of a trust company to act as the trustee.

Someone to draft the document: In most instances, the creation of a trust agreement requires the services of an attorney which can be expensive. Some investors opt to save a few hundred dollars by using an online service; however, this could end up costing your beneficiaries much more time, money, and aggravation in the long run. Seek out the services of a competent professional who you can trust to put the needs of you and your family above all else.

Now that we have reviewed the basic ingredients for trust construction, let’s dive a little deeper into the more common types of trusts used by estate planning attorneys to help clients achieve their goals.

Living trust (commonly known as a revocable trust) – When utilizing a living trust, the grantor typically funds the trust with assets throughout their lifetime. They also retain an interest in who is appointed as trustee, and beneficiary. A living trust is typically assigned to the social security number of the person who created the trust (this is important, because a trust can have its own tax ID number), which means all taxes related to the trust flow through to the grantor.

A revocable trust is most common, as circumstances change, and having the flexibility to change aspects of the trust at will is a desirable feature. Keep in mind that upon the death of the grantor, this trust will become irrevocable, which means whoever the beneficiary is at the time of death, will receive the assets in accordance with the trust document.

Testamentary trust (also referred to as a trust under will) – The main difference between a living trust and a testamentary trust is that a testamentary trust is created after the death of the grantor according to their will. These trusts are designed to accomplish various estate planning goals such as:

-Preventing minors from inheriting assets until they reach a certain age
-Preserving assets for children from a previous marriage
-Providing for a special-needs beneficiary
-Gifting to charities

As you can imagine, this is not an all-inclusive list, as estate planning can be a very complex practice that caters to the needs of various individuals and their unique circumstances.

How do I know if I may need a trust?

Contrary to my previous blog post cataloging the basic estate planning documents everyone should have, not everyone needs to establish a trust. In some instances you could pass down your assets just as effectively through the use of a Transfer on Death agreement.

If you are unsure if a trust is right for you, talk with your wealth manager or estate attorney. While sometimes an uncomfortable topic to discuss, proper end of life planning (especially for higher net worth individuals) is essential to leaving a legacy in an efficient and tax-effective manner. If you are an existing client of All Star Financial and have questions or concerns surrounding your estate, schedule an appointment to come speak with us. We are here to serve you and your wealth management needs!

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