The Basics of Trusts and Revocable Living Trusts

A discussion of “what is a trust” begins with the basics of trusts and revocable living trusts – trusts are entities that exist just as individual people exist.  Trusts, therefore, are capable of doing most things that people are capable of doing with respect to operating in business and life.  They can enter contracts, buy real estate, make investments, open bank accounts, start businesses, and even inherent property.

Like business entities, trusts operate at the direction of people.  The people who create trusts and put assets into them are called settlors, grantors or trustors.  The people who operate and manage the trusts are called trustees.  Trustees make the decisions, and they direct trust assets.  Of course, there are constraints.  For one, trust documents typically spell out the guidelines that trustees must follow.  In addition, the law imposes a very high level of fiduciary responsibilities on trustees in order to ensure that they are managing assets properly and not engaging in improper conflicts of interest.

Finally, the people who receive trust income and those who are entitled to receive trust principal are called beneficiaries.  In other words, trustees manage trust assets for the beneficiaries.  Under certain circumstances, this structure—management of assets by the trustee for the benefit of the beneficiaries, who have no control over the assets—creates a shield between the creditors of beneficiaries and assets held in trust.

 

Grantor Trusts

Grantor trusts are trusts where the settlor is also the beneficiary.  Revocable living trusts are an example of grantor trusts.  In an RLT, the same person or people are the settlors, beneficiaries, and the trustees.  In this type of setting, trust assets aren’t protected from creditors.  One purpose of a revocable living trust is to avoid probate after death – but there are many very important reasons for creating a trust other than avoiding the cost, time and public nature of a probate.  By putting assets into the name of a trust, you can retain control of those assets and beneficial use of those assets and, at the same time, avoid ever giving the judicial system control over the disposition of your assets when you die (and avoid being subject to unnecessary taxes).

Revocable living trusts are the ultimate in “pass through” type entities.  The settlor retains all the benefits of ownership (and runs the risk of exposing assets in the trust to creditors), including the ability to sell, lease or mortgage certain property, and has a built-in last will and testament-type feature.

 

Trusts: Not One Size Fits All

Realistically, anyone who expects to die with even a small net worth needs to have a revocable living trust and a will.  In general, a will will typically leave everything to the revocable living trust, which then controls how assets are distributed.  Again, this is all designed to avoid an expensive and unpredictable probate process.  This type of will is commonly known as a “Pour Over Will” as it pours the assets into the trust.

But some people need additional planning such as trusts that are more protective in nature—trusts that truly protect against the claims of creditors or those who might file frivolous lawsuits.  Others need trusts to protect against estate taxes.  Whatever your ultimate needs may be, you will likely need to start with a revocable living trust and a will.

 

Putting Your Plan Together

We can do two things for you.  First, we can assess your situation and put together a revocable living trust and will that places your estate beyond the reach of a judge.  Second, we can help you determine what other sorts of estate planning tools might be appropriate for your situation.

 

Share This