There are two steps involved in setting up a trust. Most people get the first step right, but then fail to perform the second step properly. However, both steps need to be completed properly in order for the trust to achieve the estate planning objectives for which it was created.
The first step in setting up a trust involves drafting and signing a trust agreement. A trust agreement is essentially a legal document that specifies:
That being said, the person creating the trust is referred to as the settlor or grantor. The person, persons, or entities given the authority to manage the trust is referred to as the trustee. And those who are entitled to benefit from the trust assets are referred to as trust beneficiaries.
In most revocable living trusts, the settlor also acts as the trustee while he or she is alive and able, and will specify who will step into that role when he or she dies or becomes incapacitated. Depending on why an irrevocable trust is being formed, the trustee may be the settlor or the trustee may be an independent trustee or entity, such as a private trust company.
The vitally important second step in setting up a trust, that so many fail to perform properly, is referred to as funding the trust. What this means is to transfer ownership of the settlor's assets to the trust by modifying the deed for real estate or transferring the title of an investment or stock account so that it names the trust as the owner of the asset rather than the settlor.
Should you neglect to transfer ownership of any asset to your trust, that asset will need to go through probate after you die and before it can be transferred to your heirs. These "overlooked" assets are typically transferred with a pour over will which instructs the executor of your estate to transfer all assets into your trust. Because the pour over will is going will need to go through the probate process, this can be time-consuming and expensive and may result in a loss of privacy and possibly estate tax consequences.
Another way of setting up a trust is through your last will and testament. By including certain language in your will, you can create what is called a testamentary trust. This type of trust differs from others in that it is not formed or funded until after you pass away.
A testamentary trust is most often used to provide for minor children and/or to ensure that your heirs don't spend their entire inheritance all at once, by distributing the income or assets to them a little bit at a time, rather than in one lump sum.
A trust is a legal entity that is created to hold title to property for the benefit of others. When property is held by a trust, title to the property is split in two. The trustee holds legal title to the trust assets, and the beneficiary holds equitable title to the property.
This means that the trustee can only use the trust assets for the benefit of the people named as beneficiaries in the trust agreement, but never for his or her own benefit.
The beneficiaries equitable title to the trust assets means that they have the right to have the assets used for their benefit, in the manner specified by the grantor when he or she set up the trust.
Because trusts have the ability to split title to assets and carry out the grantor's specific instructions long after the grantor has passed away, trust are very flexible. There are many different reasons why you might want to set up a trust, for instance:
These are just some of the many reasons why you might want to set up a trust. Other reasons include, Medicaid spend down avoidance, federal estate tax avoidance, and charitable giving.
To learn more about how to set up and properly fund a trust and why you may need one, consult with an experienced estate planning attorney by contacting us through the contact link on our website.
While it is a good idea for you to learn as much as you can about trusts and other estate planning mechanisms, you can't expect to become an expert in the subject right away.
An experienced estate planning attorney will have the knowledge and expertise needed to help identify the goals you want to accomplish and then set up and fund the trust that will help you accomplish your individual estate planning goals. To schedule a consultation with our experienced Colorado estate planning attorneys, please use the contact link on our website.