A trust is a written agreement between the person who creates it (the “grantor”) and the person who carries out instructions (the “trustee”). Property transferred to, and owned by, a trust must be managed and ultimately distributed according to the trust’s terms. Many variations are possible.
A common use of trusts is to control property and pay expenses for children after their 18th birthday. Without a trust, most property going to minor children is held by their guardian until they turn 18, and then given to them. Many parents believe that this is too young, and would prefer to wait until the children are 25 or 30, especially if significant funds are involved. The trustee could be instructed to use trust funds to pay for education, uninsured medical expenses, normal living costs, etc., and then pay out whatever is left at the desired age.
While a properly drafted trust is in effect, the trust’s assets generally cannot be reached by a child’s creditors, at least not until the funds are payable to them. So trusts have what is often referred to as an “asset protection” function as well.
Life insurance remains an often-used means of funding trusts for spouses and children.
Trusts are also often used as a way to manage assets during old age, for the grantor or their spouse as long as they live, and then for distribution to children or other named beneficiaries.
Trusts may be revocable (amended or terminated later) or irrevocable. Great care should be taken before making any trust irrevocable, because these trusts cannot be changed and once an asset is placed in an irrevocable trust it must stay there until the terms of the trust allow for distribution.
The grantor may also be the trustee, and this is a popular choice. It allows a person to maintain control over the trust—including selling and replacing assets—while assuring them that the remaining assets will be held and then paid out according to the trust terms after they die. A successor trustee must be named to take over when the grantor resigns or dies. These so-called grantor trusts do not provide asset protection.
The same person holding powers of attorney or named personal representative is often also named as trustee. But there are many circumstances where this does not work. Several local banks still operate trust departments and will serve this function if their criteria are met.
Contact Jones Obenchain if you have a question about trusts and whether they’ll work for you and your family.