Like most people, I had a very limited (and ultimately misguided) understanding of trusts prior to my entry into financial services. Up to that point my perception of a trust was largely shaped by context clues and Hollywood. Essentially, young Patrick envisioned someone (often a young adult) from an uber-wealthy family who wasn’t concerned with money or work because they had a “trust fund”.
While those situations exist of course, I have yet to come across one in a professional capacity. Instead what I’ve seen time and time again is the use of trusts as a highly effective wealth transfer vehicle for the “millionaire down the street”.
Forming A Trust
Let’s start with the basics around revocable or “living” trusts. A trust is first formed on paper when an attorney drafts the actual document, and the client (known as the grantor) signs it. The document will name someone to be in charge of the trust, and give them the authority to make decisions / oversee the trust’s assets. This person put in charge is known as the trustee, and is very often the same person that is setting up the trust. That way the grantor maintains full control of the trust and its assets while they’re alive. Hence the nickname “living trust”. Second, the document provides instructions for how assets held by the trust should be managed and eventually distributed. In that way it’s similar to a Last Will and Testament.
It’s important to note that creating a trust by signing the document is meaningless until the trust actually holds assets. Which is why in the following days / weeks after a trust is formed the grantor and attorney are often working together to put the grantor’s personal assets into the trust. I once worked with an attorney who described a newly signed trust as an empty box: “It’s now our job to fill the box with assets”.
The grantor fills the box by retitling their own personal assets to now be owned by the trust. For example, the grantor can retitle their personal residence or other real estate. The same goes for investments and bank accounts. Of course the idea of signing away your personal assets can sound a little worrisome. But remember, as grantor and trustee you can retain the authority to change the trust and use the assets at your discretion. As another attorney once explained to an apprehensive grantor / trustee client, “You are the trust, and the trust is you”.
Described above are the basic elements of a revocable trust. You have the grantor who sets up the trust, and very often names themselves as trustee so they maintain control and use of the assets. Then upon the grantors passing the document contains specific instructions for what happens to the trust assets. So far all of this probably sounds a lot like what a will accomplishes. So why go through the added stress and expense of setting up a trust? What makes this option more attractive?
Quick wins with a Trust
There are a couple of things a trust accomplishes right out of the gate. First, and perhaps the primary reason for its rise in popularity, is the fact that trust assets skip probate. Probate is the court-supervised process of settling a person’s estate after they die, including validating their will, paying any outstanding debts and taxes, and eventually distributing assets to heirs. While that sounds relatively straightforward, I can assure you, very often, it’s not.
In the early stages of my career I spent about a year supporting an estate settlement officer. During that time I became intimately aware of just how tedious, frustrating, and drawn-out the probate process can be. The thing to understand about probate is that processes tend to move at a snail’s pace when dealing with the local court system. Even further, the higher the value of assets being passed through probate, the more tedious and complex the process becomes. All the while, the heirs of the estate are waiting (often months) to receive what is rightfully intended to be theirs under the will.
Trust assets bypass the probate process completely, and trust beneficiaries can automatically and immediately become legal owners of trust property upon the grantors passing (if that’s how the document is drafted). No months long wait for court approvals, and therefore no frustration among beneficiaries. Trusts essentially grease the wheels of your estate plan, ensuring expediency in the passing of your assets to heirs.
Another major advantage to trusts is the privacy they provide. Because there are no formal court proceedings for assets passing through a trust, there is far less information available to the public on exactly what assets are being passed and to whom. While privacy may not be of primary concern for many, it does provide added protection in specific situations.
It’s not uncommon for a grantor to divide their assets unevenly among family members, or disinherit a family member all together for one reason or another. In that case, a trust being a private document provides very little ability for outside parties to scrutinize who’s getting what and how much. In theory, only the trustee (and successor trustee) has to know how much each beneficiary will ultimately inherit, perhaps avoiding hurt feelings or inter-family squabbles.
If, however, feelings are hurt and a beneficiary or disinherited family member feels they’ve been unfairly slighted, it’s far more difficult to successfully contest a trust compared to a will. The multi-step process of creating, funding, and overseeing a trust provides reasonably strong evidence the grantor understood and intended their trust provisions. In comparison, executing a will simply requires a signature, which provides far less evidence of understanding and intent, making it easier to question the decedent’s capacity at the time of signing.
Additional Options within a trust
Expediency and privacy tend to be the primary reasons driving more people towards trusts in my experience. And, honestly, those two alone are reason enough to seriously consider a trust over a will as your primary estate document. However, it shouldn’t be understated the level of customability and control that can be written into a trust compared to a will. As the same attorney mentioned above would ask: “How much control do you want from the grave?”
In the case of a will, once the probate process is completed, heirs receive their share of the estate outright, and what they do with their new found wealth is completely up to them. In many cases that’s fine and is what’s intended. But in others, the person whose wealth is being inherited may have concerns about how quickly and what their wealth will ultimately be spent on. Especially, if it’s a particularly large sum of money being inherited by someone with a poor history of handling their own finances.
Unlike a will, a trust can stipulate when a beneficiary should receive their inheritance, whether it be incrementally over a period of years or outright after reaching a certain age. Furthermore, a trust can even dictate what purposes funds can be used for. Not only does this provide some degree of solace for the grantor, now knowing their hard earned wealth won’t be blown immediately and irresponsibly. But it also creates the possibility of the wealth actually growing in value over time, potentially expanding the timeline and level of support it can provide for the beneficiary. Here we have the type of trust fund young Patrick envisioned!
In my experience, most grantors are perfectly fine with setting up a revocable trust to simply bypass the probate process and allow their children quick and easy access to their inheritance. As mentioned, that in itself is a huge win from an estate planning perspective. However, it’s not uncommon for family dynamics to be more complicated, in which case a trust provides not only privacy, but an exceptional degree of customization in order to support those dynamics.
After having participated in many meetings of clients crafting their trusts with attorneys, I find the entire process fascinating. It’s worth mentioning that the above uses are merely the tip of the iceberg. I have received hours of both formal and informal training on trust work throughout my career, and still continue to stumble upon new structures and scenarios where they are highly effective. If nothing else, keep in mind that a trust is what you make of it, whether it be a straightforward solution for your estate planning needs or a vehicle for preserving your family legacy across time.
