In elder law and asset protection, trusts are used frequently as a significant planning tool. There are many different kinds of trusts that are used for different purposes. Most homeowners have a trust already without knowing it. For example, if you have a mortgage on your house, then you have a “deed of trust” on your home. The person owning the house has funded the trust with his or her home. Although not the kind of trust that we normally think about, this is a simple example of a trust that is easily recognizable to most.
Put in the most basic terms, a trust is a contract, or a type of agreement, with three different parties. The first party is responsible for creating the contract; this person is known as the grantor, trustor, trustmaker, or settlor. I prefer the term “grantor,” but they all mean the same thing. The grantor must then contract with the second party, known as the trustee. The contract, or trust, is simply an agreement between the grantor and the trustee to manage the trust pursuant to its terms. The role of the trustee is a fiduciary obligation to do what the trust calls for, even if the trustee and the grantor is the same person wearing different hats. Lastly, the third party of the trust is known as the beneficiary, or the person for whom the grantor is creating the benefit of the trust. The trustee is responsible for distributing the trust property according to the contract for the benefit of the beneficiary. Interestingly, all three parties can be the same person.
A trust, as a contract, is a very meaningful pile of papers, but it is not an entity capable of owning property in its own name; a contract cannot own property. However, a trust is designed to hold property; the way to accomplish this is by titling property that you want held in the trust pursuant to the trust terms to be transferred to the name of the trustee as a trustee. The trustee does not own this property as an individual but holds the trust property as a fiduciary. This means that if the trustee’s personal creditors sue the trustee while acting in this capacity, the trustee’s creditors will not be able to access this property to satisfy their claims, unless the trust is revocable and the debtor and trustee is the same individual. While acting as fiduciary for the trust, the trustee can invest trust property as he or she sees fit, placing funds from the trust into any authorized investment.
If you don’t enjoy a trusted family member who lives nearby to act as your Trustee, one option is to structure your trust such that the out-of-state family member acts as a co-trustee along with a local corporate fiduciary, attorney, or CPA. Oftentimes these professionals will be willing to work with you and act in this capacity, particularly when the trusted family member serves as co-trustee alongside them.
There are several different types of trusts that are commonly recognized for planning purposes. A living trust is the most common type of planning trust. This is a unique agreement that you create while you are alive and well. A living trust is the opposite of a testamentary trust, which is created at the grantor’s death. Living trusts are often revocable, as opposed to testamentary trusts, which are irrevocable and cannot be changed after death.
A revocable living trust is one where the grantor creates a trust, names himself as trustee, and also names himself as the beneficiary. As the grantor, you are acting in a different capacity in each of these three roles, so when you transfer the property to yourself as trustee, you are transferring it to yourself as trustee in a fiduciary capacity.
Revocable living trusts are often over-sold by attorneys as a way to avoid paying probate costs. While revocable living trusts may allow you to avoid probate, most families do not have high probate costs to pay in North Carolina. However, the probate costs in other states may be much more expensive, resulting in the need for more revocable living trust planning in those areas. A good estate planning attorney can advise you on whether a trust is appropriate for you based upon your unique needs, fears, or goals.
There are many different reasons why a trust may be right for some people but not for others, depending on their particular situation. For example, some people create trusts because they have more complicated family dynamics, such as children by second marriages. Other people have property that they own in different states. Many families use a trust to avoid estate or income taxes. Finally, trusts are more secure documents than wills, so that if you have a family member that may be unhappy with your testamentary directions, then a trust may be a better way to plan, because it can be almost impossible to break. Trusts are typically more expensive than preparing a simple will. Will-based planning is less expensive when prepared but more expensive upon death. Trusts are more expensive up front, but they save you money at death and provide more planning options at present.
Lastly, trusts can also be used for asset protection and public assistance planning, such as for Medicaid, Special Assistance, or Veteran’s Benefits. Additionally, you can use trusts for asset protection for your spouse or children. However, it is important to note that a revocable living trust does NOT give you asset protection while you are alive and well. Although revocable living trusts do require creditors to at least go through one additional hoop before they can get to your property, you ultimately cannot protect your property with a revocable living trust until death. A great planning option for some families, however is to use a revocable trust to leave an irrevocable trust for one’s spouse or children at the grantor’s death. This allows asset protection planning that would normally be very expensive while you are alive, but can instead be done inexpensively at death. At W.G. Alexander & Associates, we frequently encourage people to do this as a way to plan and protect their families.
Part of planning is having good documents that will work for you. It is often the case that people have unique situations that require individual plans that must be tailored to them. Don’t procrastinate – contact W.G. Alexander & Associates to assist you with your trust-based planning today!
Attorney Bill Alexander discussed these issues and more this past Tuesday on W.G. Alexander & Associates’ radio program, “Asset Protection Today,” on TalkRadio 850 WPTK (AM). Be sure to listen every Tuesday morning from 9:00-10:00 AM. To listen to this week’s show, please visit WPTF’s on demand show blog by clicking here.