Trust and Estate Planning

 

What is a trust? Your guide to trust planning

Setting up a trust is one way for people to manage their assets both throughout their life and after their death. Whether you’re thinking of setting up a trust or have recently become the beneficiary of one, this guide will help you understand what trusts are and what they can mean for your financial future.

What is a trust and who is involved?

A trust is a legal contract between at least two parties: a grantor and one or more trustees.

The grantor is the person who has assets (i.e. money, property) they would like the trustee to hold for the benefit of one or more beneficiaries. The trustee is appointed in the trust document and manages the trust for the benefit of one or more named beneficiaries.

The beneficiary is often a child or another relative, but a grantor can choose multiple beneficiaries — or even institutions such as charities or schools. There can be current beneficiaries who are entitled to payments from the trust now, and future beneficiaries (also called remainder beneficiaries) who are entitled to benefit from the trust in some way in the future.

If the trustee is a bank or other financial institution, a trust administrator will generally be assigned to your trust account to ensure proper administration. The trust administrator is also often called a trust officer.

Why do people set up trusts?

People set up trusts to make sure their assets are managed the way they wish during their lifetime, in case they become disabled, and after their death. When a grantor appoints a trustee, the grantor specifies exactly how and when they’d like their assets to be managed and/or distributed to their beneficiary or beneficiaries.

Are trusts part of estate planning?

Estate planning is the process of planning what happens to you and your assets during your lifetime, in the event, you become incapacitated and/or after your death. A trust can be one component of your overall estate plan, along with deciding on a power of attorney for healthcare and property, a healthcare directive, and more. Typically, if people choose to include a trust in their estate plan, a will is also drafted. The will ensures that any assets not titled in the name of the trust at the grantor’s death will “pour over” into the trust and be distributed according to its terms.

Is there a minimum asset value needed to set up a trust?

Despite what you may think, there’s no minimum value required to set up a trust. In other words, you don’t need large amounts of money or other assets (like stocks, bonds or real estate) to start a trust. You can put whatever amount of money or assets you want in your trust.

There are multiple considerations to make when deciding if a trust is right for you. Consult with an estate planning attorney to decide whether a trust makes financial sense for your circumstances.

What makes a trust different from a will?

While a trust may appear to be similar to a will, there are a few key differences.

Estates that are distributed via a will become a part of public record through a legal proceeding called probate, which is the court supervised process of estate settlement. This means a court needs to confirm that the will is valid, oversee the payment of final expenses and assure assets are distributed properly after the death of the grantor.

Trusts are not subject to the probate process since the grantor has already transferred the title of their assets to a trustee. This helps simplify the administrative process and keeps the management and distribution of assets private. Many families would prefer to keep the terms of the trusts that benefit future generations private, to help protect the beneficiaries as well as their assets.

What can you include in a trust?

Trusts aren’t just for cash; you can include anything from real estate to stocks, bonds, investments and business interests.

Including assets such as digital assets requires some specialized planning, so be sure to talk to your attorney about any valuable digital assets you might have (digital photography, online business interests, online financial accounts, etc.) and how to best protect them in your estate plan

Setting up a trust: 5 steps for grantors/parents

The exact process for setting up a trust will vary based on what assets you want to include in the trust and who is set to receive the assets. Here are some initial questions to ask yourself as the grantor of a trust to kickstart the process:

1. Identify what assets will go into the trust

If you’re contemplating setting up a trust, you likely already have an idea of what assets you want to include. Will it be cash, stocks, bonds? You can also include real estate in a trust, such as your home or a business property.

2. Identify who will be the beneficiary/beneficiaries of your trust

You can set up your trust so that any number of people receive your assets, from children or your spouse to a foundation or charity that you support.

3. Decide on stipulations for your trust

One of the benefits of a trust is that you can set parameters for how you want the funds or assets to be distributed. You could, for example, set up a trust for your grandchildren to be given to them when they’re ready to go to college. Or you could set up a trust for your child that they receive at the time of your death. You could choose to set up a trust to go to your favorite charity in separate installments over several years. It’s good to start thinking of these parameters now and talk to a qualified estate planning attorney or your trustee about how they can be executed as you wish.

4. Set up an appointment with your potential trustee

Perhaps the most important step of the trust process will be choosing your trustee. While it’s possible to choose a friend or family member to manage your trust for you, choosing an unbiased third-party trustee (like a bank) has several benefits.

For one, professional trustees are not tied into family dynamics and can objectively administer your trust in the best interest of the beneficiaries, subject to the terms of the trust. If the trustee is a financial institution or bank, their trust administrators will also have experience dealing with family dynamics that can arise during the process. While your trust administrator cannot draft your trust document for you, they should be able to recommend several estate planning attorneys in your community who can officially draft it for you.

During your appointment with your potential trustee, bring up any questions you may have about the trust administration process and how it might work, based on your thoughts about your family situation. Feel free to ask questions about possible drafting options, potential tax implications and other issues before you meet with your attorney to save time and cost in the drafting process.

5. Create a power of attorney for property and healthcare

When you meet with your attorney to discuss drafting the terms of the trust document, consider creating a power of attorney for any property or assets held outside of your trust. If you become disabled or unable to make decisions regarding these assets prior to your death, this person will be able to legally manage the assets for you. You could choose a child, spouse or other person who can have legal rights to handle these assets outside of the trust. A healthcare power of attorney may also be advisable; this person would be able to make medical decisions on your behalf if you can’t make them for yourself.

Setting up a trust: 3 steps for beneficiaries

It is ideal for beneficiaries to understand the terms of a trust prior to the death of the grantor. But in many cases, those financial discussions don’t happen, and the estate settlement process can trigger a mix of emotions when a loved one passes on. When it’s time to talk about the trust, however, there are a few key steps that can simplify the process, so it goes as smoothly as possible.

1. Prepare for your trust meeting

If the grantor’s trust goes into effect upon the grantor’s death, the trustee will need to have the death certificate to start the administrative process. The trustee may have other requests or questions for you if additional assets need to be gathered. The trustee will typically work closely with you, the grantor’s attorney and the grantor’s other advisors (such as a tax accountant) to finalize funding the trust and start the administrative process.

2. Meet with the trustee

The trustee will contact you to set up a meeting to go over the details of the trust documents. During this time, it’s important to understand your rights when it comes to these assets. Be prepared to ask any questions you may have. What stipulations are there regarding when you will have access to the assets? Are there rules around what you can do with the assets? What is the process for requesting a distribution from the trust? Are any distributions automatic?

Ask the trustee to explain the details of the trust and what the provisions are for who receives the assets and how they can be used. Your trustee should help communicate why the trust was set up the way it was and will need to administer the trust in accordance with the grantor’s wishes.

3. Expect to wait for assets to be distributed

Every trust is unique; that’s why it’s important to ask what you are entitled to within the trust. If assets will be distributed to you, it could take anywhere from six months to two years for them to be distributed. Or, if there are age provisions around distribution, you may need to wait until you reach a certain age to receive funds from the trust. The trust may be a lifetime trust for you with other provisions applicable at your death. Talk with the trustee about these details so you know what funds you can use and when they become available.

Whether you’re the grantor, trustee or beneficiary of a trust, knowing your specific role and what you can expect helps everything run more smoothly and ensure a more secure financial future for everyone involved.

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