What is a Trust
When it comes to Trust and Estates, it seems that everyone has heard the term “trusts.” Many times, clients come to our offices saying they “need” a Revocable Living Trust, a Life Insurance Trust, an elder law Medicaid Asset Protection Trust and/or an Irrevocable Trust. However, they do not seem to know what a trust is or why they need one. While there is a lot of good information available about trusts, there are still a lot of misconceptions about this important estate planning document.
In its simplest terms, all trusts are an agreement – a legally binding contract. The agreement is simple: 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 (Settlor), 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 beneficiary(ies), who get(s) the benefits of the trust assets.
To better understand the concept of a trust, think of a trust as a cargo ship. When you visit your attorney and sign the trust document, you are essentially building a cargo ship in which you can store your assets. Once the trust documents are signed, your trust ship is ready to protect your assets from the kinds of legal tests, storms and rough waters for which it was designed. That said, it is important to understand that not all trusts are alike. In fact, there are many different types of trusts. Each trust is designed to achieve different, and sometimes multiple, objectives. Just like boats are designed for different purposes (sailing, racing, cargo, etc.); trusts also have specific purposes. You may want to protect your assets from nursing home costs. Someone else may want to maximize Estate Tax savings. Still 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. As such, 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. No matter what type of trust “ship” you decide fits your needs, it should be “built” with safety in mind.
Unfortunately, many people think that, just because they signed the documents in their attorney’s office, they are sailing safely along. In reality, they have never left the dock. You would not set sail on a long journey without stocking your ship. The same is true for a trust. After you build your trust by signing the documents, the next step is funding the trust. By funding the trust, we mean transferring or putting your assets into the trust. Think of it as stocking the ship. Your newly created 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, you actually need to sign a new deed from you to your new trust. This process is very simple but essential to fund the trust. For transferring bank or brokerage accounts or other assets, you need to talk to each financial institution. They will have you sign a few papers to change the name on the account from your name to the name of your Trust. These financial assets are not in the trust until that paperwork is complete and the funds are transferred by your bank or financial institution. Be sure to follow up with your financial institutions and double check the account statements. Keep in mind that you do not have to transfer all of your assets into the trust. You can pick and choose which assets to transfer and which assets you are going to keep in your own name. Completing this second step is critical to the success of your estate plan. Without proper funding, your “ship” (and your estate plan) is simply lost at sea.