It’s useful to review some basic definition and functions of a trust.
It may help you if one day you are asked to be a trustee or as you dive into your own
estate planning. Some of these distinctions are artificial, but they will help you get
a quick grasp of the underlying concepts, so you can work more intelligently with your
attorney on developing a trust for your assets. WHAT IS A TRUST? Holding Another’s Property: A trust, simply
stated, is a legal relationship in which one party (the “trustee”) holds property for
the benefit of another (the “beneficiary”). Bucket Analogy: Think of a trust like a bucket:
a person puts something in the bucket (such as real estate, art, other assets, etc) and
gives it to someone to manage. 3 ROLES IN A TRUST The Grantor: The person who creates the bucket
(sets up the trust) is called a “grantor” or “trustmaker.”
The Trustee: Another person, or a designated institution, manages what is in the bucket.
This person or institution is called the “trustee”. It’s the trustee’s job to make sure everything
is accounted for and gets taken out of the bucket according to the grantor’s wishes.
The trustee can begin managing the trust right away, after the grantor passes away, or after
the grantor becomes incapacitated. The Beneficiary: There’s a third person in
this legal relationship: the “beneficiary”. This envied person’s role is to receive
some benefit from what was placed in the bucket. NOTE: It isn’t enough to just create the
bucket – It’s important that you actually put your assets into it (that is, change the
title on your assets to the name of the trust) to make sure there’s no need for a probate
after you’re gone (probate is a topic for another time). MULTIPLE ROLES IN A TRUST 3-way relationships: What might prove tricky
in this three-way (legal) relationship is that one person can have more than one role
at the same time, and, similarly, more than one person can play these roles at the same
time. One person can even play all 3 roles. Some Living Trusts: The 3 simultaneous roles
situation is most often found in a revocable living trust. In the typical living trust,
the trustmaker sets up the trust, manages the trust assets, and is the only person who
is entitled to receive any benefits from those assets.
Married Couples: In most living trusts set up by married couples, they are simultaneously
the trustmakers, the trustees, and the beneficiaries. LIVING VS. TESTAMENTARY TRUSTS Knowing the differences between common kinds
of trusts can help you choose the best trust for your estate. Living Trusts: A living trust can be revocable
or irrevocable. Revocable trusts: can be altered by the trustmaker
(i.e. “revoked”) while the trustmaker is still alive and of sound mind.
Irrevocable trusts: cannot be amended – it stays the same as when it was established. Both revocable trusts and irrevocable trusts
can be “living” trusts – that is, trusts created and operative while the person who
created them (the “grantor” or “trustmaker”) is alive. Testamentary Trusts: are trusts established
in a person’s last will and testament” (in contrast to a “living” trust) that
don’t take effect until after the death of the trustmaker. ACCOUNTING/TAX DISTINCTIONS There are some distinctions only your attorney
or accountant will care about. Simple vs. Complex Trusts: Sometimes you will
see trusts described, for accounting purposes, as being either “simple” or “complex”.
This distinction deals with the way income is distributed to the beneficiaries..
Simple trusts: mandate payment of all of the trust’s income (for example, dividends and
interest) to the beneficiaries at least once each calendar year.
Complex trusts: do not carry that same mandate – that is, income is permitted to accumulate
in the trust and isn’t required to be distributed to the beneficiaries in any particular time
frame. Grantor Trusts: there is a term used for tax
purposes, known as “grantor trust,” which deals with who is responsible for paying taxes
on any income earned by the assets in the trust. In the simplest terms, if a trust is
a grantor trust, all of the income that the trust earns is reported on the trustmaker’s
personal income tax return. If the trust is not a grantor trust, then the trust itself
is considered a separate taxpayer and must file its own separate tax return each year,
for income from trust assets. WHAT DO MOST PEOPLE CHOOSE? Revocable Living Trusts: are part of a basic
estate plan. They are established during grantor’s lifetime, and can be altered according to
grantor’s wishes. Irrevocable Living Trusts: are used in more
complex estate planning, usually to save gift or estate taxes in large estates or to provide
for young children or incapacitated adults (such as “special needs” beneficiaries),
or to keep creditors from draining the trust. NEXT STEPS Legal Counsel: It’s always best to talk to
a lawyer who specializes in trusts before deciding which type of trust is best for you.
However, it’s helpful to understand your options and prepare you for an efficient conversation
with your lawyer. Contact me at the Law Office of Janet Brewer,
(650) 325-8276, if you need help planning your estate or establishing or updating a