Trust Basics: Make Sure to Transfer Assets

Trusts are frequently used in effective estate planning to provide management of assets as well as minimize probate expenses and estate taxes.  Despite their apparent complexity, trusts can be extremely useful in many aspects of planning your estate.

To thoroughly understand trusts, you need to know the various roles of the parties affiliated with the trust in order to begin beneficial discussions with an estate planning attorney.  First, there’s the grantor.  This is the individual who establishes the trust and usually transfers funds into the trust.  Next is the trustee, who makes certain the terms of the trust, as outlined by the grantor, are carried out.  Finally, there is the beneficiary.  The beneficiary is the individual (or individuals) for whom the trust has been created.  Often a minor, the beneficiary can also be a surviving spouse, adult child or any individual in need of financial assistance (or supervision) after the death of the grantor.

Knowing these basics, you can then focus on the different types of trusts most often used for estate planning purposes. The first is a testamentary trust.  This trust is usually part of a will and comes into existence after death. With a testamentary trust, assets may pass through probate before being received by the trust.  The trust can then help divide assets for each beneficiary, manage assets, or distribute assets as required by the directions of the trust.

A living trust, also sometimes referred to as an inter-vivos trust, is created during the life of the grantor. In addition, the grantor is usually also the trustee and beneficiary of the trust. Assets are transferred into the trust during the grantor’s life and avoid probate at death.  As an added benefit, living trusts provide benefits during life, particularly in the event the grantor becomes incapable of effectively managing the assets due to reasons related to health or competency.  A living trust can identify contingent trustees who assume managerial responsibilities of the trust in the event the original trustee (usually the grantor) is unable to perform their duties.  Such forethought will avoid the excessive legal costs involved if a grantor is declared incompetent, since in such cases, annual accountings to the court are required.

A trust can be a highly effective method of controlling the management and distribution of assets.  However, a trust only works to the extent that assets have been transferred into the trust.  Often, individuals spend hours in their attorneys’ offices creating what they hope will be the perfect trust arrangement for their estate.  Unfortunately, many never get around to transferring their assets into the trust. If you create a trust for your estate plan, make certain your assets are titled in the way necessary for the trust to work, since asset titling and beneficiary designations take precedence over the directives of your will or trust.  For example, if you have a large life insurance policy naming your surviving spouse as beneficiary, a residence and summer home jointly titled with your spouse, and various investment accounts also jointly titled with your spouse, all of that will pass directly to your spouse, bypassing any trust arrangement you paid to put in place. Then whatever plans the survivor has made (or may make) will be the controlling factor for all assets going forward.

To control the distribution and management of the assets, to minimize estate tax liability and ultimately probate expenses, it is necessary to revisit all titling and beneficiary designations. Your estate planning attorney, working in tandem with your investment and insurance advisors, can assist in this process to ensure a well-coordinated and effective estate plan.

Jeff Witz, CFP® welcomes readers’ questions.  He can be reached at 800-883-8555 or witz@mediqus.com.

The information provided does not, and is not intended to, constitute legal advice. Readers should contact their attorney to obtain advice with respect to any specific legal matter.

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