Tuesday, September 23, 2008

What is a Trust and why should I consider using one?

Many of my clients have no idea about what a trust is when they first come into my office. Some of them have had an experience as a beneficiary of a trust and others have even been the trustee of a family member's trust, but when you ask them to explain the concept they generally have a difficult time doing that. For those of you who are looking for answers to the probate questions and issues that I have been blogging about, the first step in taking care of your family and avoiding probate is the revocable trust (sometimes called the Living Trust or the Family Trust).

A trust is simply an agreement between two people with an intended individual or list of beneficiaries. The individual who sets up the trust is called the Settlor (sometimes called the Grantor or Trustmaker by some attorneys) and that person gives legal title to one or more assets to one or more Trustee who holds and manages the assets for one or more specified beneficiaries. The Trustee is required to hold, manage, and administer the assets of the trust pursuant to the specific provisions that the Settlor sets up. For example, if I give a friend an investment account to hold for the benefit of my son and draft a document that instructs him to distribute all income from that property to my son on an annual basis and to distribute the principal to my son on the following schedule (one third of the principal when he reaches the age of 25, one half of the remaining principal when he reaches the age of 30, and the remaining principal when he reaches the age of 35), then I have created a trust. This is a very simple distribution plan and it can be as simple or as complex as you like. Several of my clients build in incentives for their children to work (matching W-2 or 1099 income on an annual basis), to avoid certain behaviors (allowing the trustee to withhold distributions if the child or beneficiary is abusing drugs), and other provisions to create a custom distribution plan that matches exactly what you want to accomplish.

After drafting the trust pursuant to a client's wishes, the next step is to fund the trust. This is as important of a step as the drafting of the trust and too often I review estate plans from other law firms and attorneys that are not properly funded. My next post will deal with this important step and discuss what happens when a trust is not funded at all or partially funded.