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Estate Planning: What is a Trust?

September 21, 2021

Need a refresher on trusts and how they operate? We’ve got you covered. Here’s a crash course on trusts and how they can benefit your financial situation.

First things first: What is a trust? Even if you’re already familiar with the concept, it’s a good idea to review commonly used trust terms and definitions before delving into the different types of trusts and how they function.

Basic Trust Definitions and Vocabulary

A trust is a legal arrangement that allows a person (the grantor) to transfer the rights or ownership of their assets to another person or organization (the trustee) to hold for the benefit of a third party (the beneficiary). All trusts must be composed of these three parties, plus the assets inside the trust. Let’s take a closer look at each component.

The grantor

The grantor (also known as the settlor, trustor or trust maker) is the person who creates the trust. Grantors have the responsibility to decide upon the type of trust desired, appoint a trustee, name the intended beneficiaries, and properly transfer assets to the trust. Depending on the type of trust selected, the grantor may designate herself trustee to retain control over the income and assets of the trust during her lifetime.

The trustee

The trustee is the person or organization the grantor designates to hold assets on behalf of beneficiaries. Trustees have a serious and substantial role. They must always act in the best interest of all the beneficiaries (called a “fiduciary duty”) and refrain from self-dealing or conflict of interests. Among other things, they’re also tasked with efficiently managing and prudently investing the assets under the terms of the trust and being personally involved in any decision making regarding the assets. Most important, all their actions must be honest, moral, and conducted in good faith. If a trustee fails in any of these responsibilities, the beneficiaries may sue them for breach of fiduciary.

A successor trustee is a person named in the trust to take over if the first trustee cannot fulfill her duties.

The Beneficiaries

The beneficiaries of the trust are the intended recipients of the trust’s assets. They receive the assets as instructed by the grantor according to the trust’s terms. Beneficiaries do not typically have any duties, other than potential tax responsibilities but have several rights. These rights include the right to an accounting of the assets, to information about the trust, and to remove a bad trustee.

The Assets

The assets, of course, are fundamental to the trust. A grantor may fund a trust with only one asset or several, although the type of assets allowed in a trust depends upon the trust’s nature. Grantors frequently fund trusts with items such as a cash bank account, nonretirement investment and brokerage accounts, personal property (such as motor vehicles, jewelry, books), real estate, business interests, royalties, copyrights, and trademarks, and more.

Funding a Trust

A trust cannot function correctly unless it is “funded” with the right assets. Funding a trust means re-titling the assets in the grantor’s name to the name of the trust or naming the trust as beneficiary for those assets that require a beneficiary designation. For example, if you want to include your car in a trust, you must change the title from your name to the trust’s name. If you don’t take that step, the car will remain your legal property, outside of the trust.

If you do not fund your trust in the right manner, courts will not consider the intended assets part of the trust, no matter how explicit your intention to place them there. Assets outside the trust will most likely have to pass through probate.

Stay tuned for our next blog where we will discuss the different kinds of trusts and which one is best suited for your needs.

Questions? Reach out to us at any time.

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