In the April 2020 issue of Sistah’s Place Magazine, I continue the review of the essential estate planning documents by discussing the basics of a revocable trust.
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What Is A Living Trust?
In the past two issues, we began to look at what I consider essential estate planning documents, specifically Wills and Powers of Attorney. In this issue, we will continue with Living Trusts. In general terms, a living trust is a legal agreement between two parties, similar to a contract. One person creates the trust and the other person agrees to manage the trust based on the rules established by the trust creator. The trust creator is known as the grantor, trustor, or settlor and the person that manages the trust is known as the trustee. When referring to the trust creator I will use the term grantor.
How Is a Trust Created?
The grantor decides in writing how certain assets should be managed and who shall benefit from the assets; this is the trust document. Next, the grantor transfers ownership of those assets into the name of the trust; this is considered funding the trust. The trustee accepts the assets and agrees to manage the assets based on the terms of the trust for the benefit of all named beneficiaries.
Why Is It Called a Living Trust and Are There Different Types?
A trust is considered a living trust because it takes effect during the grantor’s lifetime. There are two types of living trusts, Revocable Trusts and Irrevocable Trusts. Although they are created the same the trust language dictates the differences concerning who can manage the trust, who can benefit from the trust and whether the trust can be changed or terminated. This article will focus on revocable trusts. We will look at irrevocable trusts in the next issue.
What Makes A Trust Revocable?
The terms of a revocable trust allow the trust creator to manage the trust as well as benefit from the trust. Therefore, the trust creator can be the grantor, the trustee (as long as she has mental capacity), and the beneficiary. Further, just as the name implies, a revocable trust allows the trust creator to amend and/or change the terms of the trust as well as terminate the trust at any time and for any reason.
What’s the Purpose of a Trust?
A revocable trust is an excellent estate planning tool allowing the grantor to have full control over her assets during her life, during her incapacity and at her death. Once the revocable trust is funded, through the terms of the trust the grantor is able to clearly establish who shall benefit from the funded assets and how they are to benefit. Because the grantor is usually the primary beneficiary, she is able to clearly determine how the funded assets are to be managed in the event she has a mental disability. Such pre-planning can provide a better quality of care and living during what can be a difficult life transition. The grantor also, has the ability to determine who shall succeed her as the trustee. This person is known as the successor trustee. The successor trustee manages the trust when the grantor is unable or simply chooses to no longer manage the trust. The grantor may also, name secondary beneficiaries to benefit from the funded assets upon her death. Perhaps her chosen secondary beneficiaries are minors whom she wants to limit when and how they are to receive their bequests. Such preplanning allows her to do just that. Further, with a revocable trust the grantor can maintain her privacy by avoiding probate. This in turn will eliminate the additional court fees associated with probate and thereby leave more resources for her named beneficiaries.
How Can the Grantor Be Sure Her Instructions Will Be Followed?
A trustee is considered a fiduciary. As a fiduciary she is held to a strict standard of honesty and loyalty and has an obligation to act in the beneficiary’s best interest when managing the trust. If the fiduciary breaches her obligations she can be held personally liable for damages incurred. Therefore, first and foremost, when choosing a trustee, the grantor should choose someone trustworthy. This person should also be able to manage the trust assets to avoid loss, handle complex financial transfers, have a basic understanding of state law, and the communication skills to interact with all beneficiaries and financial institutions.
Final Thoughts.
Trusts are excellent estate planning tools that can address many needs. So why not, take this opportunity to take control of your assets to ensure they are used in the manner you choose to benefit yourself during your health and incapacity and then your loved ones after you are gone leaving a legacy to be cherished and remembered.
