You get a Trust! You get a Trust! You get a Trust! Everybody gets a Trust!
So, it is not Oprah here in my law office. Estate planning is not a one size fits all type of situation. There are certain customizations that should happen with each family’s plan. This is one (of many) reasons I am not a fan of automated legal services like Legalzoom. Decisions that are so incredibly personal should not be left to an automated system. Your family deserves the attention, care, and detailed approach of having a lawyer set-up and prepare your estate planning documents. My office offers different estate plan packages, but whatever package a client decides to go with, they will not only have the guidance of a skilled attorney helping them select the best option for their family, but they have an attorney that customizes their documents specifically to their family. [step off soap box]
So back to when people typically need a trust. The most common reasons I see families opting for a Trust based plan is for probate avoidance, for giving gifts with strings attached and protecting minor children (the minor children conversation is more than a blog post but I will share more next week about how to protect your minor children).
First, I’ll discuss probate avoidance. Remember my last post "What is a Trust Anyway?", where I discuss the different people involved in trust creation? Grantor, Trustee, and Beneficiary. What if I told you they could all be the same person? Because they can! This is commonly referred to as a Living Revocable Trust or a Revocable Living Trust. When we set these up, the Grantor, Trustee, and Beneficiary are all the same person (or persons when we create a joint Living Revocable Trust for a married couple). When you are the Grantor, Trustee, and Beneficiary at the same time, you effectively have unrestricted access to your assets that are in the Trust (remember the Trust is just an empty bucket, and for it to work properly you must put your assets inside the trust).
The real question that I know you are waiting for me to answer is why is this so great? Why is it such a cool thing that the Grantor, Trustee and Beneficiary can all be the same person??? And no, you did not read that wrong, I said cool. The reason it is such a cool thing is because when we set-up the trust we name the initial trustee and beneficiaries (which are the same people), and then, we list back-up people to serve as trustee and beneficiaries. This means we can avoid probate for any assets that are inside of the trust! The trust doesn't die. It is the Grantors, Trustees, and Beneficiaries that pass away, but we have name back-ups to the first people named. This means, when a Grantor passes away, no court process. When a Trustee passes away, no court process. When a Beneficiary passes away, no court process. There are just a couple meetings in your lawyer's office to review and re-draft a few documents where the new trustee swears in and then follows the terms of the Trust by making distributions or managing the assets. No court hearing, no witnesses, no testimony, no judge, and no listing the assets of the estate on an Inventory that is public record.
Sidebar: It’s also important for me to make the distinction at this time for any other lawyers, law students or anyone else who is reading this — in Texas, a trust is not a “entity”. This is why many of my colleagues refer to trusts as a “relationship between a trustee and beneficiary”. We do not not want to you think that a Trust is ever a separate entity. If anyone is upset about how the assets are being managed, the lack of distributions, etc., they sue the Trustee. They do not sue a trust, because the trust is not an entity. When you put assets into the Trust (bucket), you are essentially giving them to the trustee to put in the bucket. You would not sue a bucket would you? The Trustee owes an incredibly high responsibility to the beneficiary, a fiduciary duty. The responsibility of Trustee should only be entered into after careful thought, and it may go without saying but I am going to say it again… if you ever become a Trustee it is incredibly important that you seek the advice of an attorney as you carry out your duties.
The second reason I commonly see people deciding to go the Trust route is because they want to leave one of their assets (or all of their assets) to their beneficiaries, but they do not want their beneficiaries blowing all of their money in Vegas, on fancy cars, or a European getaway (I am exaggerating a bit here; Not everyone is worried about their beneficiaries blowing all the money on these things, but a fair amount do, and often for good reason too). If you remember in my last post, I briefly discussed how the beneficiary benefits from everything in the trust, but they don't get to manage it because it is the Trustee’s job.
Sometime it is helpful if you look at it this way: the Trustee is a gatekeeper of the assets in the Trust. Depending on the type of restrictions (or stings) you place on gift making in your trust, the Trustee follows those rules. So if you say absolutely no distributions are to be made to your beneficiary until they are 30, then the Trustee manages the assets (hopefully with the help of a financial professional), and doesn't make distributions until the beneficiary is 30. Some people create trusts that only allow distributions for the beneficiary’s college tuition. The Trustee is the gatekeeper and distributions are only made for tuition. The beneficiary can ask for a car, but they won’t get one. The Trustee is the one who says “yes” or “no” on distributions, and if the Trust says distributions can ONLY be made for college tuition, then distributions are only made for college tuition. Now, these are just some examples of Trusts and the examples I am using are pretty strict distribution rules. I do not see many trusts that have this strict of limitations very often but it helps you get the picture. Again, this is one of the many reasons it is helpful to work with an attorney to set up you trust. Your attorney can ask you the appropriate questions to help you determine whether you want a trust with a lot of restrictions on the gifts to your beneficiaries or very broad distribution terms for your beneficiaries. You may think you want a very strict trust but then after your attorney discusses with you what that will actually look like, you may change your mind. Either way you decide to go, our goal is to help you make the most informed and best decision for you and your family.
“Wait, a second there… you didn't talk about minor’s trusts. Everyone says I need a trust if I have minor children.” Yes! You should always talk about a trust with your estate plan attorney if you have minor children. That is a whole separate discussion which is why... next week I will share some of the important questions you should ask your estate planning attorney if you have minor children (and why you should ask those questions).