CREATION AND VIABILITY
1.What is a Living Trust?
A Living Trust or otherwise known as a “Declaration of Trust”; a Revocable Living Trust; and “Family Trust” are unique terms for a Trust. A Living Trust is a legal document, which distributes one’s assets upon their death or an incapacity.
A “Living” Trust is called a “Living Trust” because it is designed for a person’s life cycle versus just a death instrument. A Last Will and Testament is generally understood to be an estate planning tool that is designed for a person’s death.
In contrast, a Living Trust has the goal of planning for an incapacity and death. An incapacity means that a person has nursing home care or has limited ability to manage one’s affairs. Thus, a Living Trust has a wholistic view.
A Settlor, Grantor or Trustor appoints a “Trustee or co-Trustee”. A Trustee is responsible for interpreting and handling the asset distribution pursuant to the Trust Agreement. A Trustee is a fiduciary meaning that they have a legal obligation to the heirs and beneficiaries.
The Trustee also acts as a “legal owner” of property. Unlike a Will, a Trust should own property, which must have a legal owner. Ownership is critical with a Trust because the Trust should own property, which gets distributed upon an incapacity or death.
A Trustee is responsible for filing of tax returns, payment of debts and estate claims, administering the terms of the Trust Agreement. A Living Trust may be revocable or irrevocable. Trustees manage the trust agreement consistent with the beneficiary’s best interests.
As a fiduciary, the trustee has a duty of loyalty and a duty of prudence. Prudence is essentially to operate in a competent manner and with reasonable diligence.
2.Key Terms
Settlor or Trustor: The person or persons that creates a Trust.
Trustee: A person or business entity that manages the terms of the Trust Agreement. The Trust Agreement is the written legal document that governs the distribution, management, and outline of the terms involving an incapacity or death.
A living trust is a legal document, which is created during a person’s lifetime. The purpose of a living trust is to plan for the event of an incapacity or death. Furthermore, a living trust is designed to manage one’s assets free from probate court and estate conflicts between the family members and friends of the trustor.
Trustee: A Trustee is a person or entity is responsible for managing the trust administration such as distribution of assets, coordination of payment of debts and liabilities, and execution of the estate plan as designed by the Trustor(s).
Co-Trustees: A Co-Trustee is a person or multiple persons in coordination with one another or an entity that manages the coordination of the Trust Distribution and Administration involving a Trust.
Revocable vs. Irrevocable: A Revocable Trust is a Trust which may be revoked or amended prior to the death or incapacity of the Settlor or Trustor. An Irrevocable Trust is a Trust which may not be amended or modified absent limited authority of a Trust Protector or other party.
3.Creation of a Trust
Identify what is the purpose or purposes of setting up the Trust. Examples of the purpose of the Trust can include the following factors:
- The purpose of estate planning
- Estate and Gift Tax Planning Objectives
- Distribution of assets upon a death or incapacity
- Ownership of real estate ownership and privacy issues
- Single or Joint Ownership of Trust
- Asset Protection
- Coordination of Life Insurance Proceeds (“Irrevocable Life Insurance Trust” or “ILIT”)
- Gain control over assets upon a person’s death
- Management of one’s assets upon an illness or incapacity
- Protection of beneficiary’s inheritance upon a death (spendthrift provision)
- Coordination of one’s retirement assets upon a death or incapacity
- Planning for one’s incapacity or special needs situation or unique situations
4.Types of Trusts
- A Living Trust
- Irrevocable Trust (Medicaid or Life Insurance Proceeds)
- Special Needs Trust
- Retirement Plan Trust
- Single Trust Ownership
- Joint Trust Ownership (Husband and Wife or Two Partners)
- Qualified Personal Residence Trust (Estate and Gift Tax Purposes)
- Asset Protection Trust
- Medicaid Trust
OPERATION AND ADMINISTRATION
1.Lifetime Administration
Generally, the Trustee or Co-Trustees are the same as the Settlors or Trustors. During one’s lifetime, the Trust should be set-up as the ownership of a person or family’s assets such as their family home, vacation properties, real estate investments, bank and stock ownership, business interests, and many other types of assets.
2.Trust Funding
A Trust is created, and the ideal situation involves when an individual or couple changes the title to their property interests. A Trust ideally should own assets such as cars, houses, financial assets, and other types of ownership. Unfortunately, in my experience, most individuals or couples fail to utilize the benefits of a Trust Instrument.
The process of funding the trust is considered the re-titling of assets of the Trust. Often, a Trustee or Co-Trustee will purchase real estate, refinance their properties, purchase business interests, purchase cars, and do other things in their Trust’s Name(s).
3.Trust Administration During One’s Lifetime
The Trust Agreement is significant because it outlines the powers of the Trustee and appoints a Trustee, Successor Trustee, Trust Protectors, and others. To purchase or refinance assets in the Trust’s name (or out of the Trust), the financial institution will examine the terms of the Trust Agreement.
The financial institution is seeing who has been appointed as the Trustee; whether the Trust is a valid instrument; and whether the Trustee or Co-Trustee has the powers (such as borrowing funds, hiring professionals (accountants and attorneys), and purchasing real estate).
Moreover, the Trustee may want to gift property interests or transfer property out of their names into other’s names or set-up other trusts.
Selling or Refinancing Property: An Attorney Opinion letter is often required to interpret the terms of the Trust Agreement. Purpose is to support the financial institution’s decision to lend money or allow purchase of real estate.
Incapacity: A Trustee or co-Trustees are appointed to administer the financial and estate matters as well as the estate of the person decisions. A Trust or Trustee works in coordination with a Durable Power of Attorney for Property and Healthcare.
Trust Administration After a Person’s Life
The Trust becomes irrevocable at this point and a tax identification number is required for estate and trust administration purposes. A Trustee becomes a “Successor” Trustee, which means that the legal fiduciary has changed, and the Successor Trustee is responsible for management of the Trust Agreement as outlined. The Successor Trustee will file the estate tax returns, distribute assets to the heirs and beneficiaries, and coordinate any estate and trust administration efforts as outlined in the Trust Agreement.
MODIFICATION AND TERMINATION
Overview: The Trust may be modified or amended by either revoking the previous Trust or making an amendment to the Trust. The key issue is whether the Trust is Revocable or Irrevocable and whether the Grantor, Trustor, or Settlor has the capacity to amend or modify the terms of the Trust Agreement. Modification refers to changing the terms of the trust or the trust agreement. Typically, the Grantor, Trustor or Settlor may modify the terms of the Trust Agreement at any time (depending on the specific requirements of the Trust Agreement).
The Trustee holds legal title to the assets of another person or otherwise called the “Grantor, Trustor or Settlor”. The Trustee manages the Trust for the benefit of beneficiaries, which are the person or entities that will inherit upon one’s death. A Settlor may change the beneficiaries at any time as well (as long as the Trust is Revocable, and the Settlor has sound mind and memory). Upon the death o the Settlor, the terms of the Trust Agreement become “Irrevocable”. Irrevocable means that the terms of the Trust may not be modified or changed.
Judicial Modification: Judicial modification is required when the terms of the trust are unclear, and a court order is required to interpret the trust maker’s intent. A Judicial Modification is not always cost-effective or the best strategy. The term “decanting” involves transfer the successor trustee role to another trustee that cures the deficiencies of the Trust Agreement. The advantage of decanting is the ability to modify the terms of the grantor without judicial process nor the consent of Grantor, Trust Maker, Settlor or Trustor.
Termination of the Trust: Typically, a Trust is terminated in the following methods: a) Consent of the Trustee and all of the beneficiaries of the trust agreement. Thus, everybody consents to the termination of the trust; b) Drafting a Revocation of Trust, which revokes the terms of the trust; c) The Grantor, Settlor, or Testor revokes the terms of the Trust while they are alive and in good capacity. The Trust Agreement may give the Trustee power to terminate the Trust in certain circumstances (such as under $100,000 in assets).
