This writing is the third in a series regarding estate planning. The first writing covered the goals of estate planning and how things can go wrong if a person has not done it. The second writing discussed how a will can help with the first estate planning goal of transferring a person’s assets the way he wants after his death, although the will has significant limitations with doing that efficiently.
This writing discusses the trust, and how it overcomes those limitations. If handled correctly, a trust will avoid a probate decedent’s estate court proceeding for transferring assets after a person’s death.
A trust is a document that creates relationships for management of a person’s assets among people that she selects. As the person signing and creating the trust, she is known as the settlor (also known as trustor or grantor). In the trust she names a succession of people to be in charge of managing her assets, and the person in charge is called the trustee. And she names people to benefit from her assets, which are called the beneficiaries.
Most people make themselves the initial trustee, so that they remain in charge of their assets. Most people also make themselves the initial beneficiary, so that they still benefit from their assets during their life. And it is common for a trust to be for the benefit for two people such as a married couple.
The key to transferring assets at a person’s death this way is that the trust also states who the beneficiaries will be to receive that person’s assets after his death (much like a will does). His assets will go to those people after he dies.
One can be creative regarding how she provides for those people to receive her assets after her death. They can receive the assets outright and be done. Or she may want to address some specific issues through the distributions. The next writing will discuss distributions (or transfer) options.
Finally, please know that a person’s trust must be “funded”, and the terms of his trust, i.e., the words of the trust document, apply only to assets that he “transfers into the trust”. One funds the trust and transfers assets into it by changing the owner of the asset from his name outright to his name as trustee of the trust. For example, a bank account owned by “John Smith” would need to have the owner changed to be “John Smith, Trustee of the John Smith Trust dated January 19, 2022.”
Think of the trust as a moving van because essentially that is what it does—it moves assets from one place to another. The trust document is like Google Maps, Ways, or any other way of providing directions—it tells the driver of the moving van where to take the assets. And the trustee of the trust is the driver of the moving van in this example.
It would be silly to pay for a moving van to arrive at a person’s home to move all of her furniture to a new home, provide the driver with directions of where to take the furniture, and then send the driver to her new home with an empty moving van because she has not loaded her furniture into it. That is essentially what would happen if she does not change the owner of her assets from her name outright to her name as trustee of the trust.
Another way to think of a trust is that it is a box that holds things. A person is free to put things in the box (by changing the owner of the assets from his name outright to his name as trustee of the trust), and he is free to remove things from the box (by changing the owner of the assets from his name as trustee of the trust to his name outright). Similarly, he could sell something like a house that is in the box and replace it with another house that he places into the box. He does not need to change the trust terms, i.e., the words of the trust document, to move things in and out of it.
A final thought about wills: As stated above, the words of the trust document apply only to assets that a person “transfers into the trust”. Further, it is possible that a person may have assets that have not been transferred to the trust at her death. In case that happens, she needs a will that would transfer all of her assets to the trust after her death.
So having a trust does not mean that a person should not also have a will. When a person has a trust his will normally should be a “pour-over” will that provides that all of his assets transfer to the trust after his death. The pour-over will is a back-up device, and it is best not to need to use it because using it may result in a probate decedent’s estate court proceeding that most people are trying to avoid. This is discussed in more detail in the prior writing.