Gary and his wife had two lovely adult children, a son in college and a daughter just out of college. Gary had married his young wife later in life, in the middle of a successful business career. He was still in business but beyond typical retirement age. His health also wasn’t that great. With his heart and diabetes issues, Gary knew it was high time that he put a sound estate plan in place. The only trouble he could see, though, was that his adult daughter, as sweet as she was, had no financial sense. She was also so innocent as to be gullible. Anyone could easily take advantage of her. Gary and his wife wanted to bless both their children with a substantial legacy out of Gary’s business interests. But Gary didn’t want to see his daughter promptly lose her legacy to scam or swindle. Gary knew he needed a sound solution.

Definition

A trust is a legal construct in which the grantor places valuable property or other interests in the hands of a trustee to hold for the benefit of the designated trust beneficiary. The grantor is the one who owns and controls the valuable interest and wants to see it managed for a specific person or benefit. The trustee is the one who holds and manages the interest for the benefit that the trust document specifies. Rather than just give or transfer the interest to the beneficiary, the grantor conveys the interest into the trust for the trustee’s management. A trust presumes that the trustee’s management will better accomplish the purposes for the conveyance, to promote the interests of the trust beneficiary, than a direct transfer into the control of the beneficiary. A trust has a purpose to preserve assets for the beneficiary, when the beneficiary might not do so, due to some circumstance or disability. 

Purpose

The purpose of a trust is indeed to preserve, pursue, and promote whatever benefit the trust designates, typically to further the interests of a person, family or group of people, organization, or cause. Individuals and families use trusts to hold property for a minor child, mentally incompetent adult child, spouse unsophisticated in financial and legal affairs, or other family members who might be subject to duress or coercion to invade and waste the trust principal. If, for instance, you wish to leave your children equal inheritances, but one child has a severe drug addiction on which that child would waste the inheritance, then you might place that child’s inheritance in a trust managed by a responsible person for that child’s long-term benefit. Yet trusts can also promote a cause or public interest. If, for instance, you wanted your family farm to remain farmland after your demise, rather than have your heirs promptly sell it off for subdivision housing, you might place the farm in a land-conservation trust. Trusts can be enormously effective means for enhancing legacies of private care and public benefit. 

Family

If you accumulate the wealth to care for your family for generations into the future, you may create a family trust to do so, rather than entrust that wealth to the management of individual family members. If you pass your fortune on to your children, they may manage that fortune to bless your future generations. But then again, they may not. They may instead squander your fortune on riotous living or frivolous or good causes, diverting your fortune from your intention to provide for your future generations. In that case, you might prefer to create a family trust with a corporate trustee to manage your fortune indefinitely into the future for your family line’s benefit. Your grandchildren, great-grandchildren, and further generations could receive education, support, and other care and benefit from your wealth, leaving you a vast family legacy. Properly managed through a family trust, wealth can be an incredible blessing and legacy.

Alternatives

Trusts fill an important niche. You may not have great alternatives. If your goal is to care for a child, sibling, or other ward incapable of their own care, then you could supply the means directly to the caretaker. But then, you’d have to trust the caretaker to apply the means for the ward’s benefit, of which you’d have no guarantee. If you convey title to the property to the caretaker without restricting the property in trust, then the caretaker may do as the caretaker wishes with the property, including to expend it for the caretaker’s own benefit or misdirect it to other causes. You might alternatively make arrangements with a service provider to the person whom you wish to benefit, such as prepaying for services, a lease, or other benefits. But those arrangements might only be short term or temporary and would still rely on the service provider to fulfill the contracted commitment. You could also add your beneficiary as a joint owner or beneficiary designee on your property with a spouse or other responsible owners who may continue to manage it for the beneficiary’s benefit. Explore these and other options with qualified counsel. A trust, though, can be an important tool in leaving a legacy.  

Execution

A trust is a legal document requiring execution meeting state law requirements. While state trust laws vary, the trust document must generally clearly state the grantor’s intent to create the trust. The grantor must have the mental competence and adult capacity to do so. The trust document must name the beneficiary, identify the trust asset or assets, and designate a trustee and the trustee’s powers and duties. Finally, the trust document must declare the lawful purpose of the trust, such as to provide for the beneficiary’s education, housing, care, or other similar benefit. The grantor must sign the trust document, often referred to as the declaration of trust or deed of settlement. State law may require notarization of the grantor’s signature or two adult competent witnesses to sign, attesting to the grantor’s identity, signature, and competence. 

Funding

The final step for a trust to be valid is its funding. A declaration of trust without conveyance of the trust asset under the trustee’s control is an empty promise. Funding the trust may require the transfer of monies or securities from a personal account into a trust account at the same institution or another institution. Funding the trust may in addition or alternatively require the deeding of property or titling of personal property from your personal name into the trust’s name. Your funding of the trust completes the transactions, making the trust effective for its purposes as the declaration of trust provides. Imagine the legacy you can leave by funding a trust for your most beneficial possible purposes.

Pour-Over

Funding a trust during your lifetime requires setting aside funds out of your income and assets on which you and your dependent family members live. Funding a trust during your lifetime can thus present challenges, when you don’t know how long you’ll live or your needs during your lifetime. You may instead prefer to fund the trust only on your demise out of your estate or to add funding to an already-funded trust out of your estate on your demise. A pour-over will and revocable living trust are means for doing so. A pour-over will transfers the specified assets from you to your trust on your demise, without the necessity of probating those assets. During your lifetime, you may modify or revoke the living trust, which becomes irrevocable and fully funded only on your demise. A pour-over will and revocable living trust can be a good way to have the benefit of both a will and trust, to enhance your legacy.

Trustees

Your choice of trustees can be critical to the effectiveness of your trust. You may be your own trustee in a revocable living trust, so that you can manage the trust assets during your lifetime, while also retaining the ability to revoke or alter the trust. But you generally cannot and should not be the trustee of an irrevocable, funded trust. Doing so defeats the goal of preserving the trust assets for your designated beneficiary and purpose. You may choose a trusted family member such as an adult child to be the trustee of a trust for the benefit of another family member. Doing so, though, may strain family relationships. You may prefer a corporate trustee, naming a bank or trust company, which then supplies the trained professionals to fulfill the trustee’s duties. Professional fiduciaries charge fees for their trust management, but the fees may be worth it and necessary to achieve the trust’s purpose. You won’t preserve your intended legacy if you choose an irresponsible, unqualified, or dishonest trustee. And you can frustrate your legacy by appointing a family member trustee, only to see family relationships strained. Choose your trustee wisely.

Powers

Your declaration of trust also states the trustee’s powers. Those powers may be broad or narrow, with greater or lesser discretion. You may, for instance, direct the trustee to spend no more than a certain amount per year for the beneficiary’s needs, out of the trust’s interest and dividend income or appreciation of assets. Or you may instead grant the trustee broader power to invade the principal for the beneficiary’s needs, as the trustee determines. Generally, the broader the trustee’s powers, the more risk to the trust and pressure on the trustee. Broad powers may be appropriate to respond to unpredictable conditions and needs. But be cautious in how much power you authorize your trust’s trustee. Get qualified advice on who to appoint as the trustee of your trust, what powers to grant the trustee, and what limitations and conditions to set on the trustee. Trustee powers can determine the course and quality of your legacy.

Bonds

Grantors generally have the option of requiring their trustee to serve under a bond. A bond can secure the trust against the trustee’s dishonest or substandard performance. If the trustee steals the trust assets or diverts them to unapproved uses, and the trustee lacks the means to reimburse the trust for the loss from the misconduct, the bond company may step in to pay the trust for its losses. Requiring a bond is generally wise. Yet bonds can add significant administrative costs to a trust. Let your estate planning attorney advise you on whether to require that your trustee serve under a bond. Don’t lose your legacy to a dishonest or incompetent trustee.

Representation

As in the case of executing a will, you should generally have qualified estate planning counsel to execute and fund a trust. The same attorney who advises you regarding your will likely has the qualifications to advise you as to a trust and help you execute and fund that trust. Locate a qualified attorney through word of mouth from trusted friends and acquaintances familiar with the attorney’s services, or local or state bar lawyer referral services. Meet with the attorney to learn about qualifications, services, and costs, before retaining the attorney. Get the skilled and experienced help you need to enhance your legacy through a well-designed trust.

Reflection

Can you see a good reason to execute and fund a trust, from your review of the above information? If so, who would your trust benefit and for what purpose? How would you fund the trust, and with how much? How long would you expect your trust to last? Would you fund your trust now out of your current assets or later with a pour-over will on your demise? Do you have a family member who should serve as your trust’s trustee or would you better use a corporate trustee? What powers would you want your trustee to have, whether broader or narrower? How would you prefer that your trustee manage the trust’s funds, to expend only trust income while preserving and growing principal, or to expend income and principal with the expectation of soon or eventually exhausting the trust? 

Key Points

• A trust requires a trustee to secure trust funds for specific benefit.

• A trust’s purpose is to place funds under secure management.

• Trust alternatives are few but may include joint ownership.

• Executing a trust generally requires a signed and witnessed writing.

• A trust becomes effective when funded with the trust property or asset.

• You can fund a revocable living trust with a pour-over will at demise.

• Careful choice of trustees can promote the survival of your legacy.

• Grant trustee powers to accomplish the trust’s purpose, reducing risks.

• Requiring a trustee bond can secure the trust but be expensive.

• Get qualified attorney representation to advise you as to your trust.

Read Chapter 15.