Let’s Talk About Estate Planning – Trusts 101

Trusts: the topic no one wants to talk about, which most people should talk about and everyone wishes they had talked about. It can be a daunting subject, so we’re here to help break it down into bite-sized pieces!

First thing’s first – what is a trust? A trust is a legal arrangement that is created during a person’s life that survives through their death. You can think of a trust as a right to ownership of money or property. Trusts are usually created with estate planning in mind but can be used for a variety of things. 

Secondly, what are the main pillars of a trust? Four key terms are important to remember:

1. The Grantor: the person who puts assets into the trust.
2. The Trustee: the person charged with managing the trust.
3. The Beneficiary(ies): the person or people who will eventually benefit from the trust.
4. The Property: items held in the name of the trust (also known as principal or corpus.)

For example, Grandpa Joe (the grantor) creates a trust for estate planning purposes. He lists his oldest child as the trustee and all his children as equal beneficiaries. He transfers his home, vehicle, cabin and brokerage accounts to be titled under the trust’s name instead of his individual name. For his individual tax purposes, nothing changes. 

Thirdly, how many different types of trusts are there? There are numerous types of trusts, but the two most common are Revocable and Irrevocable. 

• Revocable trusts can be changed or revoked entirely. This is most likely the type of trust Grandpa Joe will create. He serves as the initial trustee while he’s alive, and when he dies the executor of his estate becomes the trustee.  Upon death, the trust becomes irrevocable and is included in Grandpa Joe’s gross estate. 
• Irrevocable trusts cannot be changed or revoked, by anyone. Once property is put into a trust, it cannot be taken out. Upon death, the trust becomes a part of the gross estate.

Trusts in the lens of estate planning can be split into two groups: inter vivos and testamentary. Inter vivos trusts are created during a person’s lifetime while testamentary trusts are created by the last will and testament of the person upon their death. Inter vivos trusts can be either revocable or irrevocable while testamentary trusts can only be irrevocable. Oftentimes, inter vivos trusts are funded or have property put into them before the individual’s death while testamentary trusts may not be funded until the individual’s assets go through probate. 

The benefits of having a trust created before death can be worth the time you take to create the trust and transfer property into it. By creating a trust, you can avoid having to put the trust assets through probate. Probate is a legal proceeding where the state authenticates the decedent’s will, makes sure the decedent’s debts are paid and ensures all assets are distributed to the proper beneficiaries. This entire process is avoided for assets placed in trust, which usually results in lower legal fees and less time spent in probate court. Creating a trust can also preserve property for beneficiaries. For example, if for some reason Grandpa Joe is moved into the memory care unit and is no longer able to take care of the house, the trustee can step in to maintain the property and make payments on mortgages and property taxes.

If you’ve made it this far, you get an automatic A in Trusts 101! While it is a good place to start, this is just the beginning of trusts and estate planning. If you have any questions or just want to have a conversation about possibilities for your estate planning strategy, please feel free to reach out to our tax team at Mahoney.