Understanding a Simple Trust
April 28, 2012
A SIMPLE EXPLANATION OF A TRUST
When it comes to Estate Planning, it seems that everyone has heard of “trusts.” We cannot tell you how many times clients come to our offices asking for a Trust while not really knowing what one is. While there is a lot of good information available about trusts, there are still a lot of misconceptions about this important estate planning document. As a result, few people really understand what a Trust is and what it is supposed to accomplish.
In its simplest terms, a trust is an agreement, a legally binding contract. The agreement is this: one person (or legal entity such as a trust company) agrees to hold or manage the assets of another person for the benefit of a third person. Each trust has three parties: (a) the Grantor, who is the person putting his or her assets in trust; (b) the Trustee, who is agreeing to hold or manage the assets; and (c) the beneficiaries, who gets the benefits of the trust assets.
To better understand the concept of a trust, think of a trust as a ship. When you visit your attorney and sign the trust document, you are essentially buying a vessel in which you can store your assets. Once the trust documents are signed, your trust ship is established and can protect your assets from the kinds of legal tests, storms and rough waters for which it was designed. It is important to understand that not all trusts are alike. In fact, there are many different types of trusts; each designed to achieve different, and sometimes multiple, objectives. Just like boats are designed for different purposes (sailing, racing, cargo, etc.); trusts can also have specific purposes. You may need to protect your assets from nursing home costs. You may want to maximize Estate Tax savings. Others may need to plan for a disabled child or for children with drug, alcohol or gambling issues. There is no “one size fits all” type of trust. Each family is different and each trust should be custom drafted to meet your family’s particular estate planning objectives. And, just like having a boat is not for everyone, so it is true for trusts. Contrary to what you may hear in the media, a trust is not right for everyone. Not matter what type of trust ship you select, it should be “built” with safety in mind. Unfortunately, many people think that, just because they signed the trust documents in their attorney’s office, they are sailing safely along. In reality, they have never left the dock.
Now, you would not set sail on a long journey without stocking your ship. The same is true for a trust. After you establish your trust ship, the next step is “funding the trust.” By funding the trust, we mean putting your assets into the trust. Your trust ship has an endless hull for you to store your assets. It can hold one or multiple pieces of real estate. It can hold one or multiple checking, savings, and/or investment accounts. It can also hold life insurance policies. It can hold all these assets and more. For real estate that is being placed into your trust ship, you actually need to sign a new deed from you to your new trust. This process is very simple and actually places real estate into your trust. For bank or brokerage accounts or other assets into the trust, you need to talk to each financial institution, sign a few papers to change the name on the account from your to the name of your Trust. These assets are not in the trust until that paperwork is complete and the funds are transferred. Be sure to follow up with your financial institutions and double check the account statements. Keep in mind that you do not have to put all of your assets into the trust. You can pick and choose which assets to put in trust and which assets you are going to keep in your own name. Completing this second step is critical to the success of fund your trust. Without proper funding, your trust ship (and your estate plan) is simply lost at sea.
While this column addresses the basic components of a Trust, future columns will provide more detail on the various types of Trusts and their specific uses.