A Last Will and Testament is one of the most common documents individuals are aware of when deciding to begin the estate planning process. However, there is another way that a person can protect their assets and it’s called a trust. A trust can provide benefits that a Will may not be able to provide, for example, avoiding the probate court proceeding process. If you are considering creating a trust to protect your assets, there are important topics that should be considered not only by the grantor (also referred to as a settlor,) but also by the trustee that are listed below. However, this is not an exhaustive list.
Determine the type of trust. The first item to consider when deciding to create a trust is determining the type of trust to open. The two main types of trusts that most people have heard about are a revocable trust and an irrevocable trust. A revocable trust can be modified and revoked at any point by the grantor, and the grantor has the ability to change the trust. The grantor is often the trustee as well for revocable trusts and can access the assets in the trust at any time. An irrevocable trust is different as it cannot be modified or revoked by the grantor upon opening. The trustee will not be the grantor in the case of an irrevocable trust, and the grantor will not be able to access and use the trust assets without the permission of the trustee. A revocable trust will become an irrevocable trust upon the passing of the grantor. Both types of trusts have their own advantages and disadvantages that should be considered before opening one.
Carefully choose a trustee. Next, the grantor should consider who to name as the trustee of the trust. This is an important decision as the trustee will have control over the trust assets and will have the ability to manage those assets and their distribution to the beneficiaries.
The grantor should initially consider whether the person is willing to serve as the trustee as that person must be willing to serve. The grantor should speak with the potential trustee(s) before appointing one. Another aspect that should be considered is the trustworthiness of the potential trustee(s). It is highly important that the grantor choose a trustee that will fulfill the trust’s terms and will implement the distribution of assets properly and according to the wishes of the grantor per the terms of the trust. Although many individuals will want to select a spouse or close relative, it is important to consider the items above in making sure that person is the best fit for the role of trustee as that person will have significant responsibility with respect to managing the trust.
Determine the beneficiaries. Additionally, the grantor will need to determine who to list as beneficiaries of the trust assets. A grantor can choose just one beneficiary or multiple beneficiaries. The grantor should decide when they want assets to be available to a beneficiary, for example, if there is a minor beneficiary, the grantor can state that assets can be distributed to the beneficiary once they reach age 25. This can help protect the assets until the person is of an age to handle the type of benefits that may be received from the trust assets.
The grantor can also state specific conditions in the trust before the assets will be distributed to the beneficiary, such as adding a provision that states the beneficiary will receive their portion of the distribution once they graduate from college. It is important for the grantor to determine how they want a beneficiary to receive the distribution before creating the trust in order for the trustee to be able to manage the trust in a way that complies with the grantor’s wishes. Moreover, a grantor can also determine if there is anyone that should be excluded from receiving any assets from the trust and can state that information in the trust document, so it is clear from the beginning.
Have an understanding of all estate planning documents/trust agreements. One of the most important steps a trustee can take in beginning to manage and distribute the assets in a trust is to have a complete understanding of all the estate planning documents and the trust agreement that the grantor has set in place. It is highly important for the trustee to follow the terms of the trust, therefore reading and understanding the information in the trust document is essential in administering the trust assets properly. It is also important to understand whether the grantor also has a Last Will for any remaining assets not named in the trust and who the Executor is under the Will. The trustee may want to consult an estate planning attorney, like one from Dickmann, Reason, Bogigian & White, to assist in administering the trust assets according to the provisions in the trust document.
The trust should have its own bank account. The trustee should open a separate bank account for the trust in order to better maintain the trust assets and to not commingle any money in the trust with any accounts that may not be included. Additionally, a separate bank account for the trust is important, as the trust is a separate legal entity, trust expenses can be paid from the trust bank account and assist in filing taxes for the trust.
Keep an inventory/detailed records. A trustee should create an inventory of all of the assets that are in the trust to keep track of where everything is located, how much is in the trust, and to manage distribution of those assets properly. The trustee also needs to keep detailed records of anything the trustee does while administering the trust in order to answer any questions beneficiaries may have about where the money/assets are going or being distributed and to protect the trustee from any complaints of noncompliance or mishandling of the trust assets. This is important because the trustee should have constant communication with the beneficiaries about how the trust assets are being handled and managed since they are the ones the trust is there to benefit, and the trustee is there to adhere to the trust language and manage the trust in good faith.
There are many aspects to consider when creating and administering a trust, so it is important to meet with an attorney and research before creating a trust in order to provide the best protection of the assets and fully understand how the trust will be administered and distributed to the beneficiaries.