Have a question about setting up a Trust?

What is a Trust?

 

A “trust” is a legal entity created by a person to hold and distribute various assets. The most common types of trusts for people to create are “living trusts,” where an individual sets up a trust that he or she uses for financial support and eventually has distributed to heirs after his or her death.

 

The benefit to creating trusts is that they can allow their creator, called a “grantor,” “settlor” or “donor,” to control pieces of property or assets without having them technically be owned by his or her estate when they die. Since the trust is controlled outside of the estate, its assets will not be distributed by the deceased’s will and, therefore, kept out of public record. Additionally, some other types of trusts can be used to help avoid or defer estate taxes.

 

Who Controls It?

 

When a trust is established, the grantor has to name two parties: the trustee and the beneficiaries. A “trustee” is a person responsible for holding the property of a trust and making sure the benefits it has go to the right people (i.e. the beneficiaries). “Beneficiaries” are simply the individuals who receive income or assets from the trust.

 

Many times, a grantor will initially name themselves both beneficiary and trustee of the trust he or she created. This means the grantor still gets to control the property and receive the benefits of it. The grantor doesn’t own the property directly, but rather controls it for personal benefit. If the trust is “revocable,” as most are, the grantor has the ability to cancel the trust at any point during his or her life.

 

When the grantor or other trustee dies, control of a trust passes to the next trustee named by the grantor. Sometimes the trustee is one of the next beneficiaries, but it is common for the grantor to name an investment firm as the trustee or co-trustee. By having a professional firm control a trust, the grantor is assured that experts are handling or assisting in management of the trust. The trust usually provides compensation to the trustee for the time and management efforts.

 

Trustee Responsibility

 

Trustees are bound to a trust by “fiduciary responsibility.” Fiduciaries are investors or account managers who are duty-bound to do whatever is in the best interest of beneficiaries. Breach of fiduciary duty can occur when trustees try to gain profit for themselves at the expense of the named beneficiaries or when trustees do not adequately attend to the needs of the trust. Inexperienced trustees can also accidently breach fiduciary duty by failing to file all the required legal paperwork.

 

Areas of responsibility include the following:

 

  • Protection of trust and trust properties – A trustee must maintain properties and defend a trust from any legal claims against it.

 

  • Remain loyal and unbiased to beneficiaries – Trustees must grow and distribute a trust according to the guidelines laid down by the grantor. They must place beneficiary needs above all else.

 

  • Faithful administration – All paperwork and information should be made available to beneficiaries and filed with government agencies as needed.

 

  • Prudent management – Just like any financial advisor, trustees have a duty to make justifiably wise decisions for the assets of the beneficiaries. Even if the trustee is beneficiary, the trust’s assets must be invested wisely for the sake of everyone affected by the trust.

 

  • Division from personal property - It is essential for trustees to manage a trust entirely separate from their own finances.  Every expense of a trust should be paid by the trust’s funds only, never a private fund. If a trustee is also a beneficiary and his or her finances get tied into the trust, the trust’s assets could be applied to the trustee’s personal income tax. Strict separation between trust and trustee finances must be faithfully observed.

 

  • Accepting responsibility – Trustees are not allowed to hand over the common responsibilities of a trust to another person or create a new trustee. Depending on state of residence and trust guidelines, some responsibilities (e.g. investing) can be legally passed to experts because they fall outside of actions the trustee could reasonably be expected to perform adequately.

 

The role of trustee can be a daunting task for an average person. Unless a trustee has some form of legal background, it is likely that he or she will need to research responsibilities and legal requirements before a developing a firm grasp on the situation. Management advice is available to trustees from legal offices if necessary.

 

The End of a Trust

 

Eventually, every trust is dissolved and its assets are distributed as the grantor predetermined. For some trusts, this is almost immediately after the grantor’s death, but many times it is years before the assets are fully distributed. In either case, the trustee is responsible for contacting the beneficiaries and gathering the legal documents needed to officially turn over control of property. Once every asset has been distributed, the trust ceases to exist and the trustee is absolved of his or her fiduciary duty.

 

Considering a Trustee

 

When setting up a trust for yourself, you will need to carefully consider who should follow you as trustee. Many firms and banks have proven trustee expertise and can alleviate your loved ones from the responsibilities of being a trustee. These financial institutions tend to charge more for the management of a trust but provide expertise that personal acquaintances probably lack. However, some grantors feel it is important to get direct involvement of loved ones as trustees to ensure properties are managed in keeping with family wishes.

 

If you have any questions or interests in creating or managing a life trust, contact your financial advisor for guidance. Trusts can be extremely beneficial to both grantor and beneficiaries, but they are not always required for the best estate management

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Investment advisory services are offered through Safe Harbor Fiduciary, LLC, a Registered Investment Advisor. Insurance products and services are offered through Safe Harbor Tax Advisory, LLC.

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