A Guide To Trusts - Trusts 101

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Explore:  Estate Planning Trusts

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It's useful to review some basic definition and functions of a trust. It may help you if one day you are asked to be a trustee or as you dive into your own estate planning. Some of these distinctions are artificial, but they will help you get a quick grasp of the underlying concepts, so you can work more intelligently with your attorney on developing a trust for your assets.

California Trust Attorney - Palo Alto CAWHAT IS A TRUST?

  • Holding Another's Property: A trust, simply stated, is a legal relationship in which one party (the “trustee”) holds property for the benefit of another (the “beneficiary”).

  • Bucket Analogy: Think of a trust like a bucket: a person puts something in the bucket (such as real estate, art, other assets, etc) and gives it to someone to manage.

3 ROLES IN A TRUST

  • The Grantor: The person who creates the bucket (sets up the trust) is called a “grantor” or “trustmaker.”

  • The Trustee: Another person, or a designated institution, manages what is in the bucket. This person or institution is called the “trustee”. It’s the trustee’s job to make sure everything is accounted for and gets taken out of the bucket according to the grantor’s wishes. The trustee can begin managing the trust right away, after the grantor passes away, or after the grantor becomes incapacitated.

  • The Beneficiary: There's a third person in this legal relationship: the “beneficiary”. This envied person’s role is to receive some benefit from what was placed in the bucket.

NOTE: It isn’t enough to just create the bucket - It’s important that you actually put your assets into it (that is, change the title on your assets to the name of the trust) to make sure there’s no need for a probate after you’re gone (probate is a topic for another time).

MULTIPLE ROLES IN A TRUST

  • 3-way relationships: What might prove tricky in this three-way (legal) relationship is that one person can have more than one role at the same time, and, similarly, more than one person can play these roles at the same time. One person can even play all 3 roles.

  • Some Living Trusts: The 3 simultaneous roles situation is most often found in a revocable living trust. In the typical living trust, the trustmaker sets up the trust, manages the trust assets, and is the only person who is entitled to receive any benefits from those assets.

  • Married Couples: In most living trusts set up by married couples, they are simultaneously the trustmakers, the trustees, and the beneficiaries.

LIVING VS. TESTAMENTARY TRUSTS

Knowing the differences between common kinds of trusts can help you choose the best trust for your estate.

Living Trusts: A living trust can be revocable or irrevocable.

  • Revocable trusts: can be altered by the trustmaker (i.e. “revoked”) while the trustmaker is still alive and of sound mind.

  • Irrevocable trusts: cannot be amended - it stays the same as when it was established.

Both revocable trusts and irrevocable trusts can be “living” trusts - that is, trusts created and operative while the person who created them (the “grantor” or “trustmaker”) is alive.

Testamentary Trusts: are trusts established in a person’s last will and testament” (in contrast to a “living” trust) that don’t take effect until after the death of the trustmaker.

ACCOUNTING/TAX DISTINCTIONS

There are some distinctions only your attorney or accountant will care about.

Simple vs. Complex Trusts: Sometimes you will see trusts described, for accounting purposes, as being either “simple” or “complex”. This distinction deals with the way income is distributed to the beneficiaries..

  • Simple trusts: mandate payment of all of the trust’s income (for example, dividends and interest) to the beneficiaries at least once each calendar year.

  • Complex trusts: do not carry that same mandate - that is, income is permitted to accumulate in the trust and isn’t required to be distributed to the beneficiaries in any particular time frame.

Grantor Trusts: there is a term used for tax purposes, known as “grantor trust,” which deals with who is responsible for paying taxes on any income earned by the assets in the trust. In the simplest terms, if a trust is a grantor trust, all of the income that the trust earns is reported on the trustmaker’s personal income tax return. If the trust is not a grantor trust, then the trust itself is considered a separate taxpayer and must file its own separate tax return each year, for income from trust assets.

WHAT DO MOST PEOPLE CHOOSE?

  • Revocable Living Trusts: are part of a basic estate plan. They are established during grantor's lifetime, and can be altered according to grantor's wishes.

  • Irrevocable Living Trusts: are used in more complex estate planning, usually to save gift or estate taxes in large estates or to provide for young children or incapacitated adults (such as “special needs” beneficiaries), or to keep creditors from draining the trust.

NEXT STEPS

  • Legal Counsel: It's always best to talk to a lawyer who specializes in trusts before deciding which type of trust is best for you. However, it's helpful to understand your options and prepare you for an efficient conversation with your lawyer.

Topics:  Estate Planning, Trusts

Published In: Tax Updates, Wills, Trusts, & Estate Planning Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Janet Brewer, Law Offices of Janet L. Brewer | Attorney Advertising

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Janet Brewer
Law Offices of Janet L. Brewer

Janet Brewer has practiced California estate, gift-planning, and probate law exclusively since 1991.... View Profile »


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