Trusts
No matter what property you’re trying to protect, a trust is an important tool to consider adding to your estate plan. Below, we’ve answered common questions to help no matter your trust needs.
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Understanding Trusts:
What is a Trust?
A trust holds assets so that they can be passed down to one’s beneficiaries. This estate planning method establishes a fiduciary relationship in which a trustor (person establishing the trust) gives a trustee (person/entity who manages the trust) the authority to handle assets for the trustor’s beneficiaries (those for whom the trust was created).
Think of a trust as a container and assets as the contents. Tangible property like houses and jewelry can be placed in a trust, as can intangible property, like stocks and business interests.
Trusts can be especially useful for those with large estates, to ensure assets are efficiently distributed to beneficiaries, to avoid probate court, and to bypass or reduce certain taxes.
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Important Trust Terms
Understanding trusts means understanding trust-related vocabulary. We’ve broken down some important trust terms to help paint a clearer picture of what’s involved with this estate planning tool.
- Trust Agreement
A trust agreement (also called a trust instrument) is the legal document that establishes a trust. At a minimum, it will name parties such as trustor, trustee, and beneficiaries. It will also describe the assets that fund the trust and how those assets are to be distributed to the beneficiaries. - Trustor
Also called a grantor or settler, the trustor is the person who creates or establishes the trust. - Trustee
A trustee is named by the trustor to manage the trust and ensure that beneficiaries receive property as intended. A trust can have a single trustee or multiple, and the trustee can be a person or business entity. In the case of living revocable trusts, the trustee is most often the same person as the trustor. - Successor Trustee
The successor trustee is the the person or entity who replaces the trustee should they be unwilling or unable to serve. For example, if you serve as your own trustee, the successor trustee would take control of the trust upon your death or incapacity. - Trust Beneficiaries
Trust beneficiaries are the recipients of the trust’s property. They are the people or business entities the trust was created to benefit. - Fiduciary Relationship
A fiduciary relationship occurs when one party is obligated to act for the benefit of another party. For example, in relation to trusts, a fiduciary relationship occurs between trustee and beneficiary. - Probate
Probate is the legal process through which assets are distributed upon someone’s death. If there is a will, it needs to be deemed valid—probate is the process that determines this validity, settles any debts, and identifies what estate taxes need to be paid. Probate can be expensive and time-consuming, which are primary reasons that people seek to avoid it. Revocable and irrevocable trusts avoid probate, so long as all assets have been placed in the trust. (Any assets not placed in the trust may need to go through probate; rules vary by state.) Testamentary trusts do not avoid probate. - Wills
Wills are legal documents that describe people’s wishes upon their deaths. One important feature of wills vs. trusts is that wills don’t actually hold assets. Wills simply explain how assets should be distributed.
Types of Trusts
There are many types of trusts, each useful for different reasons. We’ve broken down several common categories of trusts below.
Revocable Trusts
Revocable trusts (also known as living trusts or revocable living trusts) are established during the trustor’s lifetime, becoming active the moment the trustor signs the document. They only become permanent once the trustor dies. Revocable trusts can be altered or revoked by the trustor at any time prior to the their death.
Property used to fund revocable trusts must be placed in the name of the trust. This means that a house placed in a trust will technically no longer belong to the trustor—it will belong to the trust. Even so, in most cases the trustor will retain control of the property until their death. This is because, with revocable trusts, the trustor and trustee are often the same person. Property placed in a revocable trust can even be sold by the trustee without needing to revoke the trust.
Since revocable trusts can be changed throughout the trustor’s life, they provide a certain amount of flexibility. In addition to their flexibility, a benefit of revocable trusts is that they often avoid probate court, which can save beneficiaries money and time.
Irrevocable Trusts
Irrevocable trusts are active during the trustor’s lifetime and cannot be easily altered. Many states only allow alterations if all beneficiaries consent, and the process can be convoluted, difficult, and varied.
When assets are placed in an irrevocable trust, they are no longer the trustor’s property—they’re the property of the trust until they pass to beneficiaries after the trustor’s death or some other named date or condition. Unlike revocable trusts, which allow trustors to retain control of assets, irrevocable trusts require trustors to relinquish control of any assets placed in the trust.
When assets are placed in an irrevocable trust, it is harder for them to be taxed or to be claimed as debt payments by the trustor’s creditors. Irrevocable trusts also avoid the probate process, which can add to their appeal.
Testamentary Trusts
Testamentary trusts are created via the terms of a will, only becoming valid after the death of the trustor. As such, testamentary trusts are irrevocable, as they can’t be altered once activated after the trustor’s death.
Testamentary trusts do not avoid probate court. Since testamentary trusts are set out in a will, they are subject to the same probate process that wills are subject to. In fact, it is only after the will goes through probate that the trust is created.
While some may consider probate court a downside of testamentary trusts, these trusts may provide some benefits. They can be especially useful if beneficiaries are young because testamentary trusts allow for the inclusion of specific rules regarding when the trust’s assets should be distributed or how they should be used. Testamentary trusts can also help shield assets from a beneficiary’s creditors.
Trusts can be confusing and complex.
No matter your trust question, we can help. Need a trust drafted or reviewed? We can do that, too. Learn More About Law on CallRequirements of a Valid Trust
For a trust to be valid, several requirements must be met. While individual states or institutions may have additional requirements when it comes to creating a valid trust, some essentials are true across the board.
In every trust, specific parties must be named and asset ownership must be transferred to the name of the trust. So, a trust isn’t solely made up of the trust agreement—it also includes paperwork that transfers asset ownership, such as deeds and titles. We go over these requirements in more detail below.
What parties must be named in a trust?
One of a trust’s requirements simply has to do with the document’s language and the roles assigned within. To be valid, a trust must identify the following parties:
- Trustor (trust creator)
- Trustee (trust manager )
- Successor Trustee (backup trust manager)
- Trust Beneficiaries (those who receive a trust’s assets, usually after trustor’s death)
How do I fund a trust?
Before a trust can become valid, it must be funded, meaning property must be transferred into the name of the trust. Simply drafting a trust agreement is insufficient—you also need to include documents that transfer asset ownership. While a transfer of ownership needs to occur for all assets placed in a trust, the required paperwork varies based on the type of property and the rules set forth by individual states and institutions.
Below are a few common types of assets that fund trusts and some of the paperwork that may be required to make the transfer.
- Real Estate
To transfer ownership of a house or other real estate into a trust, a deed will need to be created that transfers title—and thus, ownership—to the trust. (A title identifies the legal owner of a piece of property. A deed is the legal document that actually transfers ownership of property from one party to another.) - Vehicles
Before funding a trust, cars and other vehicles with a title will need to get a new title that identifies the trust as the owner. Vehicle registration will need to be changed as well. - Other Real Property
Not all property has a title—in fact, most property is title-less. If you want to place real property such as jewelry, collectibles, clothing, or furniture into a trust, trust ownership needs to be assigned via a document that describes the items being transferred, often called a property schedule. - Financial Accounts
Transferring bank and financial accounts into a trust generally involves filling out required forms that vary depending on the bank or financial institution. You may also need to provide the bank with details about the trust. - Business Interest
How business interests are transferred into a trust varies. It depends on the type of business, your role in it, and the rules set forth in any foundational documents such as bylaws or operating agreements. For example, if you have business partners, you may need their written consent before transferring ownership/interest, particularly if the bylaws require it.
Trust FAQs
How much does it cost to set up a trust?
The cost to set up a trust depends on various factors, including the type of trust, the state you live in, and how complex your situation is. So, a trust can cost anywhere from a couple hundred dollars to many thousands.
A simple DIY trust done online costs less, but might be incomplete, often prohibiting you from customizing the trust for your personal situation. An estate planning attorney will most likely charge more, but you can work with the attorney to customize the provisions of the trust to fit your needs and desires.
At Law on Call, a trust can cost as little as $400 and end up saving you thousands of dollars if you can avoid probate.
How long does it take to create a trust?
Creating a trust agreement often doesn’t take too long. At Law on Call, we can create a trust for you starting at just 4 hours once we have all the necessary information. (Keep in mind those hours probably won’t be consecutive, and it might still take a bit of time for you to receive the draft of your trust.) What takes longer, however, is transferring property into the trust. Depending on what you’re transferring, this process can take upwards of weeks or months. Trusts may also need to be maintained and updated as situations change, such as going through a divorce or acquiring assets.
At Law on Call, we can draft your trust, review a trust you already have in place, and/or update your trust as needed.
Who needs a trust?
In the “who needs a trust” discussion, a couple factors play a large part. The first centers around age and health. Healthy, middle-aged people are perhaps less likely to need a trust than older people, or those in poor health. Wealth is also an important factor. Those with more assets might be more inclined to create a trust than those of moderate or lower wealth. There are other factors to consider, too, such as marital status and if there are specific rules around when you want your assets distributed to beneficiaries.
Ultimately, whether you need or want a trust will come down to your specific situation. At Law on Call, we can help you determine which type of trust (if any) is right for you.
Do I need a trust and a will?
You do not necessarily need to have a trust and a will, but many people choose to have both documents in place. A will tends to be a more simple document that states what assets should go to whom. A trust, on the other hand, tends to be more detailed and actually holds assets prior to their distribution. Most people with estate plans have a will at a minimum.
Whether you need a trust and a will is a personal decision that comes down to your specific situation and the specific assets you’re trying to pass down and protect. Give us a call and we’ll help you sort out what might be best for you.
Do all trusts bypass probate?
No. Some trusts must go through probate, specifically testamentary trusts. Since testamentary trusts are set forth in a will, and wills must go through probate, testamentary trusts are subject to the same process. Revocable and irrevocable trusts bypass probate. However, if any assets are left out of these trusts, those left-behind assets may be subject to probate.
What kinds of assets can I transfer to a trust?
All kinds of assets can be transferred to a trust, from a house to a stamp collection to your interest in a business. As long as it’s an asset that you own, there are few limits to what can be placed in a trust. Ultimately, what you place in your trust will depend on the type of trust you create, as well as your reasons for establishing the trust.
Does a trust or trustee own the assets that fund a trust?
A trust’s assets are owned by the trust itself. The trustee is the steward of the assets. While some sources say that the trustee is the owner of a trust’s assets, this isn’t accurate. If a trustee were deemed to own the assets, it would only be in the sense that the trustee has the right and responsibility to manage the trust’s assets—the trustee would not have the right to do with the assets what they want for their own benefit.