Frequently Asked Questions about Trusts

What is a living trust?

A fully-funded and properly maintained living trust-centered plan allows you to avoid many of the common mistakes and problems associated with traditional estate planning tools. A trust is a private contract between you as the trustmaker and you as the trustee. Spouses often create a joint trust where they act as co-trustmakers and co-trustees. While you are alive and well you continue to control all assets in the trust because you are the trustee of your own trust. During your lifetime you also continue to be the beneficiary of all assets and income from the trust. When you die or become disabled, your trust will name the individual or individuals you would like to have control over your assets. These successor trustees are given power and authority over your assets by the terms of the trust contract. There is no need for property held in the name of the trust to pass through the probate court. You direct who is to receive the property, when they are to receive it, and who will be in control of the property. A living trust is sometimes referred to as a will substitute. A living trust is sometimes called a revocable living trust because it can be amended, changed or revoked by you during your lifetime.

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What is a family trust?

Usually, trusts are named after the trustmaker. An example would be the Johnny H. Sample Living Trust, dated March 16, 2009. A joint trust for a married couple might be called the John and Mary Sample Living Trust, dated June 3, 2010. Some practitioners call their living trusts “Family Trusts.” There is no difference between a living trust and a Family Trust when they are established during the lifetime of the trustmaker and are revocable trusts.

The name “Family Trust” is also used by some practitioners for trusts that are established at the time of death for the benefit of the surviving spouse and children. A Family Trust established at death is not a living trust. A trust established by one spouse for the other spouse at the time of death is called a “credit shelter trust” or “bypass trust.”

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What are the benefits of a living trust based plan?

Your living trust allows you to control your assets while you are alive and to pass control of the assets to trusted family or advisors upon your death or disability. A living trust also allows you to give what you want, to whom you want, the way you want, and when you want, while saving costs and avoiding red tape. This is the goal of good estate planning. A living trust plan:

Provides special instructions for your care and the care of your loved ones in the event of your disability, incapacity or death.
Remains fully effective even if you move to a new state or own property in another state.
Avoids probate proceedings and associated legal costs and delays.
Keeps your affairs and finances confidential.
Helps you organize your assets and financial holdings.
Controls all of your property, including life insurance and retirement benefits.
Provides protective trusts for young children, disadvantaged children and adult children.
Provides flexible estate tax planning.

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What is meant by “funding” the trust?

In order for a living trust to control your assets at the time of death or disability, everything you own needs to be titled in the name of your trust. Moreover, beneficiary designations or contingent beneficiary designations on life insurance, annuities and retirement benefits should be changed to include the living trust. We call the process of changing titles and beneficiary designations “funding” the trust.

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If I have a living trust, do I also need a will?

If you have a living trust-based plan, you will still want to have a pour-over will. Your pour-over will does two things. First, it names guardians for minor children. Second, the pour-over will assures that any assets that were not re-titled into the name of the trust will pass through probate and into the trust for proper distribution to loved ones.

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What happens if my trust is not funded?

The single greatest mistake people make when using a living trust is failing to initially fund them or keep them funded as time goes on. The trustee and successor trustees can only control assets titled in the name of the trust. If assets are not in the trust at the time of death or disability, the trust will not effectively pass control of the assets to the person or persons that you have designated in the trust. This means that assets might go through probate at your death and could end up in the hands of the wrong people. A pour-over will can provide a “safety net” for your living trust, but we recommend full and continuous funding of your living trust.

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Can I do my own trust funding?

As odd as it sounds, we find that most people cannot accomplish their own trust funding. There are several reasons for this. First, once a trust has been signed, clients tend to experience a sense of relief that the planning is over, and funding gets put off and eventually forgotten. Second, funding requires meticulous attention to detail and some knowledge of law, banking, forms, deeds, titling, real estate and the proper conveyance instruments. Most people lack the knowledge to get all of their property transferred. Finally, banks, title companies, mutual fund companies, motor vehicle departments, stock brokerage firms, corporations, closely held businesses, insurance companies and other large institutions that hold your assets are notorious for their inability to provide simple customer service. Often the customer service person you talk to doesn’t understand living trusts. Therefore, these institutions are unable to help you with the necessary paperwork to transfer assets you hold with them to your trust. In many cases these institutions actually give erroneous advice and thwart your efforts to fund assets into your trust. In every living trust-based plan implemented by Foley & Pearson, we work closely with you to assure that all assets are funded into your trust, and we provide an updating and maintenance service to assure that your trust is always funded.

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What happens to a trust after the trustmaker dies?

A properly funded revocable living trust or irrevocable trust can avoid probate at the time of the trustmaker’s death. However, the trustees and successor trustees of such trusts have the responsibility to follow the instructions in the trust and follow state law. This is called a trustees fiduciary duty. Usually this means that the property and assets in the trust are distributed to family members or distributed into one or more new trusts for the benefit of family members. In addition, the trustee is required to satisfy creditors of the estate of the deceased trustmaker, file income and estate tax returns, manage and liquidate assets, provide an accounting to beneficiaries and generally wind up the affairs of the person who has passed away. We call this process post-mortem trust administration.

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Can I do the post-mortem trust administration without a lawyer?

There are many pitfalls and legal requirements when administering a trust and the trustee may be liable to beneficiaries if mistakes are made. We recommend that successor trustees hire a qualified attorney to help them work through all of the post-mortem administration issues.

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What is the best way to leave property to children?

Planning for children is an important goal for many clients. How you plan for children may depend upon their age, their level of knowledge and sophistication, their ability to manage wealth, and the size of your estate. Most people agree that leaving a large inheritance for teens and young adults is problematic. Therefore, many of our clients choose to leave property and wealth to their children in trust with another family member or institution acting as trustee, until the children reach a pre-selected age when they are old enough to handle the wealth. This age may be different for different families and children. Children can be supported by trust assets as directed by the trust instrument and the discretion of the trustee. Planning for children is highly customized from case to case.

One of the benefits of establishing trusts for children is to assure that the child is protected in the event of divorce. When your wealth is passed to a child in trust, those assets do not become marital assets that are subject to claims of a son-in-law or daughter-in-law during a divorce.

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