Trusts are useful estate planning tools. Trusts serve a very broad range of uses and applications. What is trust? A trust is a three-way transaction, when the trust creator, also called a grantor or settlor, assigns money or property to be held by someone else they have confidence in – someone they trust, the trustee – for the benefit of a third party, the beneficiary.
Trusts can used be to consolidate and manage assets for yourself or for another person. Trusts are employed to direct or protect an inheritance for family members; to say who will inherit from you, and when, and how. Trusts can be structured to save taxes or to avoid probate estate legal paperwork and proceedings when you die. Trusts are created to implement charitable gifts. Trusts help to protect assets against risks and creditors, and are often used to protect disabled beneficiaries and to help them maintain their benefits, while at the same time getting added value from the trust.
Often, trust provisions are contained within a Last Will and Testament, to come into effect only later, when you die, and only if needed, such as when children are still young.
A trust agreement or trust entity can also be created during your lifetime, coming into effect and existing immediately upon creation.
A Trust isn’t a place to put things – it’s a different way to own things, rather than as an individual. The most common type of lifetime trust is a Revocable Trust, or so-called Living Trust.
Using a Living Trust instead of a Will helps to avoid legal probate proceedings and paperwork when you die, and makes it easier for your successor to wind up your affairs. You can amend it or even revoke it at any time. You can play all three roles – be the creator, the trustee and the beneficiary of your own revocable living trust.
The trustee of a trust is a fiduciary, someone who serves for the benefit of another, with a legal obligation at a high level, a “fiduciary duty” to act properly. For example, Trustees are bound by the Prudent Investor Rule, which requires safe investments under the circumstances. Trustees are obligated to protect the principal amount and assets of the trust, to keep records and to act fairly, honestly and lawfully; but above all, to follow the terms and requirements of the trust. A trustee can be personally liable for wrongful acts.
If you are the trustee of a Revocable Living Trust, perhaps for a family member, be aware that you must give notice to certain beneficiaries when specific events occur, such as if the trust creator should die or be become incapacitated. You might also have to disclose information about the trust on request. You can protect yourself from liability by reporting information periodically to the beneficiaries.
An Irrevocable Trust is just what it sounds like – you can’t revoke it or take it back once it’s created (though modern Pennsylvania trust laws can actually make it somewhat easier to change or even undo a nominally irrevocable trust, if necessary).
The reason to choose an irrevocable trust is usually to create a distinct separation between the individual, the trust and its assets. Unlike a revocable trust that you can take back any time, when the trust can’t be changed or undone, it’s more clearly a different entity, not the same as you individually.
Property transferred or gifted into an Irrevocable Trust is no longer owned by you as an individual. This can help to avoid taxation, or to make someone eligible for long-term care or disability benefits based on financial need. Giving a gift through an Irrevocable Trust to a family member can be more secure and protected than making a simple outright gift. An outright gift can be used for any purpose and is vulnerable to the risks of legal or financial problems of the recipient, such as business losses, or being caught up in a divorce.
If you are a beneficiary of any trust, you can try to enforce the trustee’s obligations to you; however, the original intent of the trust creator will ordinarily control and may be difficult to override. In addition, like any litigation in court, challenging your trustee takes resources – time, energy and money – that may be scarce. One other note: asking the court to remove a trustee is generally a difficult endeavor, allowed only on proof of clear wrongdoing by the trustee.
At Marks Elder Law, we help people every day set up both Revocable and Irrevocable Trusts, as well as act as a trustee on your behalf to administer the trust and interact with the beneficiary (ies). I invite your questions and feedback. Please let me know how I can help you and your family.