The term “trust fund” gets tossed around like a football on game day; however, if you are unsure of exactly what a trust is or how a trust works, you are not alone. Let’s be honest – talking about estate planning in general can be overwhelming.
Contrary to popular belief, a trust is not just a tool for the ultra-wealthy.
A trust is simply a legal structure or entity which can be utilized as an estate planning tool to hold and manage assets. A trust can also be drafted with specific instructions --- such as when and how the funds can be disbursed, or who may benefit from the trust funds, and even under what conditions. A trust is a way of planning ahead with clarity and control.
A Trust is like a battle plan for your life.
Where a traditional Last Will and Testament only kicks in after you pass away. However, a Living Trust, on the other hand, is active upon creation. A trust is a powerful estate planning option that can be used to manage your assets while you are still alive, if you become incapacitated, and upon your death.
Here are six benefits of most trusts:
1. Skip the Probate Parade
A properly drafted Trust helps your loved ones bypass the delays and costs of court.
2. Modern Family Estate Planning
Trusts are often easier for blended families to plan for children from previous marriages.
3. The People (and Pets) You Support
A spouse, child, or even a pet, can be taken care of with a Trust long after you are gone.
4. Privacy
Trusts offer a level of discretion most families prefer.
5. Simplicity
A Trust can hold all of your property in one place, even if owned in multiple states.
6. Contingency Planning
You can future proof your generosity by including asset protection for your beneficiaries.
Ready to dive deeper? Revocable Trusts vs. Irrevocable Trusts.
Think of a revocable trust like one of those classic red wagons – maybe you have seen a toddler pulling one filled with their most treasured possessions: a teddy bear, their blanket, a sippy cup, or maybe even a rock they believe is magical. In this analogy the wagon is the Trust. The person pulling the wagon? That is the trustee --- the one managing the trust.
Just like the toddler who decides what to place into the wagon, or what to leave behind, a trustee of a revocable trust can move assets in and out freely as they see fit. The assets in a trust may include bank accounts, investments, or even tangible items like a real property, family heirlooms, a wine collection, boat, tractor, art or a sapphire ring. Since you can still control the wagon and the contents of the wagon (the trust assets) this type of trust is referred to as revocable. You may also amend a revocable trust (change the rules), swap out assets (transfer trust assets), or leave it be for a rainy day (dynasty trust).
What happens if someone let’s go of the handle?
If the trustee drops the handle of the wagon, a co-trustee may take over, or a successor trustee is often named and given the power to pick up the handle of the wagon. In other words, if the original trustee (often called the trustor) becomes unable to manage the trust, is just too busy, or unfortunately passes away, the trustor’s friend or family member can take over just temporarily, or a permanent the successor trustee can be empowered to steps in to put the terms of the trust in action by honoring the intent of the trust.
Now for irrevocable trusts.
In some situations, it can become clear that there is a strategic option to consider a trust in which assets are not easily removed or changed (aka treasured items are placed into the wagon but not taken out of the wagon except under certain specific circumstances). This type of trust is an irrevocable trust. Once assets are placed in this type of trust, they generally stay there, and the terms of the trust cannot usually be changed (except for minor corrections or potential administrative issues).
The key difference between a revocable trust and an irrevocable trust is … Control.
With an irrevocable trust, the trustor (the person creating the trust) gives up control of the assets (aka those treasured items in the red wagon) to the trustee (for clarification this trustee is not the same person as the trustor). Why would anyone consider giving up control of their own hard-earned money or other large tangible assets in the trust like an antique car or real property?
The Upside?
By giving up control and passing the reigns to another person to serve as trustee of an irrevocable trust, there are often certain financial and legal protections – such as shielding assets from creditors, helping a loved one qualify for government benefits if an accident rendered them disabled, or even for other charitable gift purposes. Some examples of irrevocable trusts include special needs trusts, life insurance trusts, and various forms of charitable remainder trusts.
Irrevocable trusts are powerful tools – but not everyone is ready to hand over control of their trust assets. Trusting someone enough to manage your assets responsibly is a big decision – and not always an easy one.
You have options!
If a family member or friend does not come to mind as having the skills or character to be named as trustee, you may consider appointing a trusted advisor or a professional trustee to act as your fiduciary. Either way, trustees legally bound to manage a trust according to its terms.
One last thought …
Just because someone suggests that you should create a trust (revocable or irrevocable), this does not mean this type of estate planning is the right fit for you. The first step is to consider your estate planning goals. Why is estate planning important to you right now? Once you are clear on your goals, opting for a Last Will and Testament, or deciding because an irrevocable or a revocable trust becomes much easier.
If you are in need of assistance, the attorneys at Collins Family & Elder Law Group can help.
