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Kaitlin Jones

Kaitie's Deep Dive on Trusts

In the last two posts in this series, we covered the essentials of estate planning.  Trusts can be an important tool in this process so I’ll provide more information on them here.


A trust is, in essence, a legal fiction that we tell ourselves and others.  You can think of it as a bucket that holds assets and comes with a list of rules and a manager who is dead set on following those rules.  Trusts come in an infinite number of forms and uses, which is why it’s important that they be set up by a lawyer.  I’ll just cover the essential features they all have in common.  


Trustee 

The trustee is the manager responsible for ensuring the instructions outlined in the trust document are carried out. The trustee is legally required to act in the best interest of the beneficiaries (who we will cover next) and to follow the trust document.  Usually the trust document will specify: 


  • Who will start out as the trustee of the account  

  • Who should take over once the first trustee(s) are no longer able to act as trustee(s) 

  • What powers the trustee(s) have over the trust assets (can they buy and sell them; can they take out loans against it?)  

  • The circumstances and procedures under which a trustee can be removed 

  • Whether trustees need to get any special certifications (like a surety bond) to serve 

  • Whether and how trustees can be compensated for their work 


During the lifetime of the trust, the trustee will administer the assets according to the guidelines specified. Additionally, the trustee is responsible for filing any required tax returns and legal documents. Remember our analogy of the bucket full of assets? The government considers the bucket a person and therefore must still file a tax return. When the trust ends (every trust must have an end date, whether it is due to falling below a certain threshold or the death of all beneficiaries, etc.), the trustee will distribute all remaining assets to the beneficiaries.


How should I choose trustees? 

You can designate anyone as a trustee and can designate as many trustees as you want. But just because anyone can be your trustee doesn’t mean they should.  The trustee you designate should be someone you trust and it should be someone who knows and understands the parties and assets involved in the trust well. Your trustee doesn’t have to be a legal or financial professional, because the trustee can consult experts in any field necessary to administer the trust and pay for those services using trust funds.  But the trustee should be able to understand what those professionals tell them, and reasonable enough to follow good common sense (in the way you define it).   


If you decide to designate a professional as a trustee instead of family member or loved one, it’s important to look for someone who will act as a fiduciary and will take the time to get to know your situation and wishes.  


Beneficiaries 

In a trust there are two types of beneficiaries, income (sometimes called lifetime) beneficiaries, and principal (sometimes called remainder) beneficiaries. 


Income beneficiaries are those that have a right to the income generated by the trust during its lifetime (or theirs).  They do not necessarily own the property itself (the bucket does) but they do, according to the trust, have the right to any income from the assets placed in the bucket.

   

Income is defined as whatever the trust document says it is, and if the document is silent the trustee can look to their state’s law.  Income beneficiaries are entitled to receive the income as defined in the trust for as long as the trust specifies.  It’s not required to have an income beneficiary, but not having one creates a different kind of trust, called a complex trust  


Principal (remainder) beneficiaries are the ones who get whatever is left in the trust at the end.  When the event defined in the trust document that marks the end of the trust’s life (usually the death of all income beneficiaries) occurs the trust must then distribute all accumulated remaining assets (the principal) to the remainder beneficiaries.  The trust might specify individual things to go to each remainder beneficiary or just say that they each get a certain portion and let the trustee sort it out.   


Since the Trustee is basically just a servant to the beneficiaries, what if those beneficiaries don’t agree on the best course of action? What if taking an action would benefit the income beneficiaries and hurt the remainder beneficiaries?  These are all the difficult decisions of the trustee, so whoever forms the trust should make their preferences and intentions well known in the document so the trustee has some leverage to carry out these duties in line with those wishes.  


When do I need a trust? 

First, any time you wish to avoid going to probate for some reason. But there are a lot of other good reasons to have a trust set up such as: 


  • You have titled assets held in multiple states (I’m looking at you snowbirds)  

  • You have a beneficiary with special needs  

  • You or a beneficiary need some protection from creditors or even if you are just concerned about how your beneficiary handles their money or that they may face some negative influence in the future. 

  • You are getting remarried or have some sort of a blended family. 

  • Your wishes for the care of your assets go beyond your death or are very complex. 

  • You live in a state where the probate process is expensive or time consuming (looking at you California)  

  • You have enough assets that you could possibly trigger an estate tax consequence (roughly $13.61 Million in 2024)   


How often should I review or make changes to my Trust? 

Well, if your trust is or has become irrevocable (meaning no changes can be made to it from here on out) then review it whenever you need clarification on something, but it’s pretty unlikely you will be able to make any changes.  However, if your Trust is still a revocable trust (meaning the grantors and trustee can still make changes to it) then you should review if at least: 


  • Every 5 years (just to be safe) 

  • When you get married/remarried 

  • When you get divorced 

  • When you have or adopt a child  

  • If one of the beneficiaries or trustees dies 

  • You start a new business  

  • One of your beneficiaries (or trustees) develops a substance abuse or creditor issue  

  • Whenever you buy new property 

  • Anything big that effects your life or those of you beneficiaries or trustees 


Do I really need a will if I have a trust? 

Yes, a trust will not specify who takes your kids (or pets) in the event you die, and frankly it’s pretty common for people to buy more property, forget to do their titling properly afterwards, and create quite the kerfuffle.   

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