Part I of III: What is a Trust?

A trust is an estate planning tool, but let’s back up.  What is estate planning anyway?  From a legal perspective, it is being intentional about the legacy (financial and personal) you leave by memorializing your wishes in writing.

Estate Planning Tools

Estate planning is not a single document solution. There are a myriad of tools commonly used in estate planning.  These can generally be divided into 2 categories: 1) tools that affect how our property is managed during life and 2) tools that affect how property is distributed at death.

Some examples of estate planning tools that affect how property is managed during life include:

  • inter vivos trusts (in fact, “inter vivos” is Latin for “between the living”),
  • powers of attorney,
  • joint owner arrangements, and
  • entities.

Some tools that affect how property is distributed at death are:

  • wills,
  • inter vivos trusts (yes, they do both),
  • beneficiary designations, and
  • account designations.

It is important to understand that wills and inter vivos trusts are two parallel paths reaching the same destination (that destination being the distribution of assets at death).  The distinctions in both the drive (namely, funding and the mechanics of lifetime management when an inter vivos trust is employed) and how the destination is reached (namely, formally getting the will recognized through probate or a probate alternative when a will is employed) depends on which path is chosen.  It is, therefore, important to understand the distinctions between a will and an inter vivos trust.

Wills vs. Inter Vivos Trusts
A will is a document that directs the distribution of property at death and appoints a party (the Executor) to wrap up the affairs of the decedent, manage the decedent’s property during the wrap up period, and ultimately distribute the property to the intended beneficiaries. When the distribution of property is dependent on a will, the will must be “formally recognized” through probate or a probate alternative.

An inter vivos trust (sometimes called a revocable trust or living trust) is a trust created during someone’s life.  It is similar to a will in that it is a document that directs the distribution of property at death, appoints a party (the Trustee) to wrap up the affairs of the decedent and manage the property during the “wrap up period”, but additionally, it provides for the management of property during Settlor’s life by the Trustee.

An intervivos trust has some important attributes:

1. Funding may be partial (funding means changing ownership of the asset from the name of the individual to the name of the trust).  A trust may or may not be funded with all of Settlor’s assets until a Settlor’s death.  Funding is not an all or nothing proposition.  It depends on the purpose of the trust.  A couple of examples follow.

  • If an inter vivos trust is established for the primary purpose of avoiding probate, then an all approach is essential.
  • If an individual owns minerals in multiple states and wants to avoid probate in each state, but does not wish to otherwise change the ownership of her Texas domiciled assets to an inter vivos trust, the trust can be funded with the out of state minerals now and receive any other assets intended to be distributed according to the terms of the trust via a pour over will.

2.      Pour over will.  An inter vivos trust is coupled with a pour over will.  A pour over will is a will that directs assets into an inter vivos trust.  A pour over will can place all of the assets into the trust, or it can make bequests to other beneficiaries and transfer only some of the assets into the trust.  If complete funding during lifetime is the objective, a pour over will serves as a “bootstrap approach”, essentially serving as a backup plan if an asset is missed or later discovered.

3.No formalization at death of Settlor.  As to assets in a trust, no action is needed to “formalize” the inter vivos trust at the Settlor’s death, though as to any assets not in the trust, a probate (or alternative) of the pour over will may be necessary.

Areas of Distinction

A trust is a type of written contract whereby a person (sometimes called a Settlor, Grantor, Trustor) can formalize the way a party (the Trustee) manages and distributes property for an intended beneficiary. A trust has three basic areas of distinction: when a trust is created, whether it can be changed after its creation, and its purpose.

1.       When it is created. A trust can be created by including the terms (i.e. the rules) of the trust in a stand alone document during life (inter vivos) and receiving property (even a nominal amount) during life, or it can be created by including the terms of the trust in a will (testamentary) and receiving property at death.

2.       Whether it can be changed or revoked.  If it can be changed or revoked, it’s called a revocable trust.  If it cannot, it’s considered an irrevocable trust.  It’s important to note that a revocable trust can become irrevocable upon certain “triggers” (for example, upon a Settlor’s death).

3.       Its purpose: a trust can be created for any legal purpose.  In addition to serving as the foundation of an estate plan, trusts can be created for special purposes such as addressing blending families, and designating a third party to make investment, management, and distribution decisions for beneficiaries under a certain age, for beneficiaries with spending or creditor issues, or for beneficiaries with capacity issues.

Format of Trusts

Finally, trusts follow a basic format.  This format will vary based upon the type and purpose of the trust, but generally all trusts will at a minimum address:

Beneficiary                              Who will receive the distributions of income and principal?

Trustee                                                Who will make the investment, management, and distribution decisions?

Duration                                  How long will the trust last?

Remainder Beneficiary                       If any property remains in the trust after the trust ends, who gets it?

A trust is an important estate planning tool.  If you are interested in learning who needs a trust, Part II will address just that.

This blog post provides educational information about trusts for the convenience of visitors to the site.  This post is not intended to establish and does not establish an attorney-client relationship between Normand Bozeman Zanowiak, PLLC and any visitor. The information in this blog post is not legal advice.

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