Answering the Five Most Common Questions About Trusts

Most people mistakenly believe that trusts are only for the rich and famous, or maybe just the rich. In reality, a trust can benefit anyone who has assets to protect if they would prefer to avoid probate court and control the beneficiaries of those assets. Overall, a trust provides flexibility and control over how and when a person’s assets are distributed.

We’ve compiled the top five questions to help more people understand how trusts work and their valuable benefits:

1) What is a trust?

A trust is a legal vehicle to transfer assets by allowing a third party (a trustee) to hold and direct assets owned by one party (grantor) in a trust fund on behalf of another party (a beneficiary). A trust avoids probate court and allows you to have control over your assets—not just today, but potentially for generations to come. This provides far greater flexibility than a will.

A trust requires the following for creation:

1. Grantor/Settlor – the person creating the trust.
2. Trustee – the person or entity that administers the trust.
3. Trust Property – generally cash, real estate, and/or investments

2) What are the benefits of a trust?

A trust’s primary benefit is to avoid probate upon the grantor’s death. Probate is typically a long, costly, and public process that must be undertaken when someone passes away with any assets in their sole name. Trusts are an ideal way to avoid this scenario and to have assets be professionally managed over generations and distributed according to the grantor’s intentions.

Trusts can remove assets from an estate, reduce taxes, protect assets from creditors, carry out charitable wishes, and provide income to beneficiaries across multiple generations. They also help to ensure privacy and confidentiality, which is lacking in public probate.

3) Why do I need a trust if I can just title all assets in joint ownership to avoid probate?

While checking, savings, and investment accounts are simple to title jointly, many people feel uncomfortable doing so, as they don’t want to feel as if they’re losing control of their property. A payable-on-death (POD) bank account or a transfer–on-death (TOD) retirement account is a good option to transfer title upon death to

beneficiaries without the necessity for probate. However, that can be risky. It can be easy to forget about some accounts, where they are, and how they are titled. Having one trust that consolidates everything into a single convenient location makes the entire process easier and more organized.

4) How do I set up a trust?

First, a legally binding trust document must be created with an estate planning attorney. Once the trust is set up and properly executed by all parties, the bank can then open an account in the name of the trust and transfer any money into it for funding. The money will be invested according to the asset allocation (balanced, conservative, aggressive, etc.) to which the client has agree.

5) What is the difference between a revocable and irrevocable trust?

As you may have guessed, the primary difference is that the terms can be changed at any time in a revocable trust but not in an irrevocable one. With a revocable trust, grantors generally retain control over all the assets until they become incapacitated or pass away. Usually, grantors choose to be the trustees of their own revocable trusts. Revocable trusts avoid probate for all assets titled in the name of the trust, but any assets that are not titled in the trust’s name will go through probate (unless joint, POD, or TOD). This is why it is important to make sure that grantors have titled their assets into the trust during their lifetime.

On the other hand, with an irrevocable trust, once it is created and executed, it is not revocable, even by the grantor. It’s important to note also that a revocable trust becomes irrevocable once the grantor dies. People often create trusts that fund upon their death called testamentary trusts, which are also always irrevocable.

There are several reasons for grantors to create an irrevocable trust:

• They want to transfer money to a beneficiary during their lifetime for asset protection.
• Revocable trusts do not achieve asset protection and do not avoid taxes.
• They have a lot of money and want to get some of it out of their estate before they die to avoid the 40% estate tax.

A Note on Trustees

Too often, grantors have a family member named as trustee. However, it is far more beneficial to have a corporate trustee named, such as the bank that holds the account, instead of a family member, for the following reasons:

• Continuity. An individual named as trustee may pass away before fulfilling his or her trustee obligations.
• Impartiality. A corporate trustee has a fiduciary responsibility not to play favorites among named beneficiaries.
• Circumvents family strife. This will avoid individual family members carrying out trustee duties that may not be popular with other family members.
• Alleviates the burden on family members. Having a corporate trustee allows family members to grieve the loss of their loved without worrying about how to deal with their many trustee duties, such as handling insurance matters, death claims, tax filings, and any liabilities that could arise with respect to trust administration.

Note: Not all banks which hold Trust accounts are able to serve as corporate trustees.

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Trust and Investment Services are:

• NOT FDIC INSURED
• NOT Deposits of the Bank
• NOT Guaranteed by the Bank
• NOT Insured by any government agency
• MAY lose value