If you are working on your estate plan, you should consider whether a trust should be a part of that plan. The benefits of trusts include both probate avoidance and reducing estate tax liability. Before you can determine whether a trust is a component you need in your estate plan, you need to first be able to answer the question, “what is a trust?” Once you understand what it is and what it can do, you will know what you need to create one.
What is a trust?
A trust is essentially a fiduciary agreement between a trustee and the person who creates the trust. Fiduciary means the agreement is premised on confidence and trust. The purpose of a trust agreement is to give the trustee authority to hold and manage the trust assets on behalf of the named beneficiaries.
The terms of the agreement will provide the necessary provisions for managing and distributing the trust property. There are many different types of trusts that have their own specific purpose. However, there are three basic steps required to create a trust: drafting the trust agreement, funding the trust with the property and settling the trust.
What is required in a trust agreement?
The trust agreement is basically the document that gives your instructions on how the property held in trust should be handled. It is essentially the “who, what, and when” of your trust. A trust agreement is also a contract which is binding on the trustee chosen to manage the trust property. Some of the essential terms that should be included in the trust are the identity of the trustee, the names of your beneficiaries and what you want them to receive, as well as, when they should receive those assets.
What does funding a trust mean?
Once the trust agreement has been drafted, the next step is to fund the trust. Funding is basically a matter of transferring ownership of the assets that you want to include in the trust. In other words, you need to transfer bank accounts to a new account in the name of the trust. You should also name the trust as beneficiary of life insurance policies and annuities, if applicable. If there is real property, then you need a deed transferring that real property to the trust.
You can fund a trust by changing title or ownership
Certain assets can be funded by changing the name of the owner from the name of the grantor to the name of the trust. These include bank accounts, non-IRA and non-401(k) investment and brokerage accounts. It can also include stocks and bonds held in certificate form, and real estate. Some financial institutions only require that the name on the grantor’s account be changed. Whereas, other institutions might require the grantor to close the original account and open a new one in the name of the trust.
You can fund a trust through assignment of ownership rights
When personal property is included in the trust assets, of the type that does not require a certificate of legal title, then the assets can easily be funded by assigning ownership to the trust. This can also include items like personal loans, royalties, copyrights and patents; partnership and membership interests in limited liability companies.
You can fund a trust by changing the name of the beneficiary
For assets that list a beneficiary, simply transferring the title of those assets into the name of the trust is not sufficient. Instead, the trust needs to be named as the beneficiary of the account or insurance policy, for example.
The final step is settling the trust fund
After the trust is established and funded, the final step is to settle the trust, which can only take place after the death of the grantor. Typically, once you die it is time for your trustee to follow the terms of the trust pertaining to management of your property after your death. This is usually when disputes arise, however, between relatives or anyone else who may believe they have an interest in the trust.
Why you should consult a trust attorney
There can be some complicated issues involved in creating a trust. An estate planning attorney is much better equipped at handling. Depending on how complex the terms of the trust agreement need to be, the extent and nature of the assets, and the potential complications related to the family, it could be very beneficial to have the guidance of an attorney. Here are some specific considerations that may need to be addressed.
- Do your beneficiaries have special needs?
- Are you looking to reduce your estate tax liability?
- Do you have children who are spendthrifts?
- Is there anyone you may want to disinherit?
All of these issues can be addressed as in your trust agreement.
Join us for a FREE seminar! If you have questions regarding trusts, or any other estate planning needs, please contact the Schomer Law Group for a consultation, either online or by calling us at (310) 337-7696.