A Primer on Trusts
In this podcast, we begin with an overview of several key terms associated with a trust including: Trustee, Grantor, Beneficiary, Executor, Pour Over Will. Jan describes the purpose for and structure of a trust and why a trust is important for most people, especially if they own a home in San Diego or Southern California.
Jan
Welcome to AB Cast, integrating Legal Tax Accounting and Business Solutions. I’m Jonathan Allen. Welcome to our podcast on trusts.
Neil
Janathan, we begin our conversation on trusts. We’re going to have to cover some concepts that we’ll be using within this discussion. So let’s talk about a few key terms. What is a trustee?
Jan
A trustee is the individual that’s appointed within the trust document itself to administer the trust document and the provisions and the terms within the trust.
Neil
And what is a grantor?
Jan
The grantor is the maker of the trust or the one who grants the trust, the right and the ownership of the assets that are put into the trust for distribution after death.
Neil
So basically the person who’s creating the trust? Yes. What is a beneficiary?
Jan
A beneficiary is one who obtains or inherits whatever it is that has been put into the trust from the decedent.
Neil
Okay. And what is an executor?
Jan
An executor is a term that’s similar in fashion and does what a trustee would do under a trust, but essentially an executor is the administrator of a will as opposed to a trust. But conceptually, the job under the will or under the trust is the same, but the name of the person doing the administration differs. So for a will, the executor administers the trust, and for a trust, the trustee administers the trust.
Neil
Very good. And finally, what is a poor over will?
Jan
A poor over will is a document that we utilize in the preparation of our trusts in the event that for whatever reason a trust might fail. That could happen if, say the law were to change, if something were to happen to make a term within a trust null and void, even though the maker or the trust or of the trust wants a distribution in a certain manner, it may fail. In that instance, the pour over will restates essentially the same thing as the trust does and takes over in the event that for whatever reason the trust fails or a term within the trust fails. And what it does is it restates what the original trust says. And from that restatement creates a constructive trust that can bypass any changes or any modifications that are made externally to a will that are not the wishes of the decedent.
Neil
So in other words, a safety net
Jan
Precisely
Neil
And we used the term trust or a trust or is basically the same as a grantor. Is that correct?
Jan
Trustor and the grantor and the maker are all synonymous names for those who create a trust.
Neil
Great. And now I think most of our listeners may have some level of familiarity with a trust, but what is a trust and who needs one?
Jan
Anyone who has an asset that they want to pass without going through probate is essentially a candidate for a trust. A trust is really an instrument that utilizes the probate and estate laws to create a document that allows the distribution of the assets of one’s life after death.
Neil
And the trust is more of an instantaneous transaction, whereas probate can go on for a year or longer. Correct.
Jan
In the utilization of a trust, generally there is no need to go into probate court, whereas if there is no trust and if there are assets to be passed to beneficiaries, then you have to go through probate in order to get the distribution made to the beneficiaries. And essentially the distribution really entails the changing of the title of the assets, which is the reason the probate is necessary because that can be a very complex transaction and you have to have the assets in the beneficiary’s name before they can actually inherit or take
Neil
Possession or ownership.
Jan
Precisely.
Neil
So let’s take the example of a simple house. So if I own a house and I pass away and when I pass away, I wanted to go to my children. If it goes through a trust, they basically gain access control and ownership over that house in a fairly immediate timeframe. Yes. Whereas if it goes through probate, they literally have no authority generally speaking, over the ownership or transaction of that house until the asset at clears probate, which can be well over a year. Is that a good example?
Jan
It’s a common example, yes.
Neil
So will I need a will in addition to a trust?
Jan
Well, as I indicated earlier, the pour over will is part of the package that we utilize or it’s an instrument that we utilize when we create a trust. So when we put together a living trust, for example, for a couple, we always include a pour over will because we don’t know when or if a provision or laws may change. And we want to ensure that what it is that our clients’ desires and wishes are for the distribution of their assets following their death is followed.
Neil
So the primary purpose for a trust is to protect assets and then to pass them on according to your wishes. How does a trust accomplish that?
Jan
The trust accomplishes that in two ways. I want to point out that when a trust is first initiated, for example, if you and your wife were to have a living trust, that trust is essentially a pass through entity until the death of the first spouse. And what occurs at the death of the first spouse is the here to for revocable trust becomes irrevocable. So upon the death of the first spouse, the trust essentially splits into two trusts because there is the decedent’s assets and then there’s the spousal assets. Now the spouse has the utilization of the assets within the decedent’s trust, but the decedent’s trust segments what it is that the decedent had in their lifetime as opposed to the surviving spouse. So that there are instances where particularly in the event of families that are combined, families from previous and that have children from previous marriages want to segregate their assets and some go to the children of one spouse and the assets go to the children of another spouse. And so we are segmenting the trust predicated on the death of the first spouse.
Neil
Of course. And you mentioned a revocable trust. There’s basically generally speaking two forms of trust, revocable and irrevocable. How would you describe a revocable trust?
Jan
A revocable trust are generally the living trust that you see and that are utilized in asset protection. They can be utilized in the dissemination of assets following the death of an individual. And the utilization for the avoidance of probate. An irrevocable trust is a trust where the assets are transferred into the trust and the grantor, the one that grants the assets or puts them into the trust no longer has control of them.
Neil
And so in a revocable trust, if I put an asset in, I can take it back out in an irrevocable trust. Once I place the asset within control of the trust, it’s there to stay
Jan
In most instances, yes.
Neil
Very good. So Jan, when a typical client comes in and you sit down and start the discussion about estate planning and specifically about trusts, what are some of the concerns that you see regularly and what are some of the things that you believe our clients really need to understand about the concept of a trust?
Jan
When clients come to the office for trust, generally what they’re looking for is asset protection. And the asset protection concept of a trust is that if an asset is placed into a trust, you no longer own it outright. So for example, if you and your wife were to come into the office and create a trust and we were to transfer, say your personal residence to that trust, you and your wife no longer own it. You are the beneficiaries of the trust that does own have the ownership of the trust, but it adds a layer of protection for litigation mitigation in the event that for some reason you may be sued. So most of the time that we see clients, they’re looking for asset protection. The second most common reason that we see people coming in for trust is essentially they want to ensure that their loved ones are protected in the event that they pass. And they want to ensure that the assets that they have go to the individuals that they want the assets to be assigned to. So those are the two primary reasons that we see clients coming in requesting trust assistance.
Neil
So Jan, there are actually a couple of steps in this process. You need to establish the trust and then you need to fund the trust. Can you help our audience to understand what that means?
Jan
Yes. The creation of the trust is really the memorialization, the paper contract if you will, that occurs when we create a trust funding. A trust is a concept where you have to assign the assets to the trust. And by assigning those assets, really what you’re doing is you are transferring title from yourself to the trust. Funding the trust is probably one of the most critical components because in the event that the assets that you have are not titled in the trust, then they won’t fall under the purview and the terms of the trust. So say for example, you owned a home, you have a trust, but you didn’t title the home in the trust and you were to pass, then that house wouldn’t be covered and wouldn’t be distributed to your beneficiaries, even though that may be your wish. There is a methodology to correct that issue when it arises, and it’s known as a head step petition, and that petition says to the court, we want the court to go back and say these assets really do belong in the trust. It was the intent of the trust store to put these assets into the trust and for whatever reason that wasn’t completed. And that’s generally the way that we get around the assets that may or may not be titled within the trust. But I’ve had occasions and clients and situations where they passed their assets weren’t in the trust and we were unable to get them via a head step petition into the trust and hence had to go through probate. And that’s just an unnecessary cost that can be avoided. So
Neil
And time.
Jan
Oh time is incredibly important in probate because it takes such a long period of time because the courts are so backed up. And so for us it’s when we go through and we create a trust in this office, we always go through and fund or title the assets that our clients have into the trust. And I think we’re probably one of the few firms in the county that actually do that.
Neil
And that’s an important distinction. There are a lot of places online and even advertised on television that offer trust documents on the cheap. But just because you have a trust doesn’t mean it’s doing anything at all, let alone protecting your assets and your wishes. And that’s why it’s so important to work with us.
Jan
That’s exactly right. If you don’t understand the documents that you’re putting together, chances are that the documents are not going to really do what it is that you anticipate them doing. And a trust is an excellent example of that. An unfunded trust can be a huge liability and ultimately have to go through the assets, have to go through probate because the trust wasn’t properly formed,
Neil
Which not only adds burden to those that you’re trying to benefit, but it adds cost
Jan
A lot of cost, yes.
Neil
Jan, you mentioned irrevocable trusts. What are some examples of irrevocable trusts and when to use them?
Jan
Generally, an irrevocable trust is a result of a term within a living trust. So I’ll give you an example. If I were to go back and I want to have a certain amount of my assets go to a charity, I could go back and create a charitable trust. They’re known as charitable remainder trusts. The acronyms are CRTs (Charitable Remainder Trusts). And what ends up occurring is you put those assets into those trusts which become irrevocable. In other words, once the assets are transferred, you can’t transfer them back out of those trusts without huge penalties. So what occurs is those irrevocable trusts then will be disseminated upon your passing based on the terms within your living trust. Although the assets are placed in an instrument, an irrevocable trust where they can’t be touched
Neil
In addition to charity. What are some other examples of things you would put in irrevocable trust?
Jan
You could put life insurance. Oftentimes we will go back and we’ll design a special needs trust for let’s say a child that is unable to care for themselves or a young adult due to disease or disability. And so again, within the living trust, there is a trust within a trust. And these irrevocable trusts are a result of the terms of the living trust upon the death of the trust store.
Neil
And any estate plan has to contemplate a lot more than just assets and what’s going to happen. We’re talking about elements of what traditionally might have been considered a will, but one of the most important documents is the advanced healthcare directives. What are advanced healthcare directives and how should they be incorporated into any estate plan?
Jan
Once again, in the package that we put together, an advanced healthcare directive is part of the package is included in part of the package and what the advanced healthcare directive says, it’s a notice. It puts the public on notice and in particular an individual’s doctors as to how it is that they want to be cared for in the event of disability in particular, and the inability to make healthcare decisions for themselves. So there is a power of attorney in the event that you’re unable to make those decisions for yourself. And then what is it that you want to have happen in the event that there are no medical methods with which to go back and prolong your life and how it is and how long you want to be maintained on an artificial or in an artificial manner. And it really gives the doctor, the hospital, the medical staff that are assisting you the direction as to what it is you as an individual want to, even though you’re unable to express your wishes at that point.
Neil
And is that also a place where you would select a person or persons with whom you would entrust those important decisions?
Jan
Yes, that’s the medical power of attorney. So in our trust documents, we create two powers of attorney, one for financial and one for medical. Sometimes the individuals that have those powers of attorney are the same individual, but oftentimes they aren’t. So we might have a power of attorney for one individual that will handle all of the medical decisions that need to be made for an individual and a different individual under a financial power of attorney that will handle the financial matters for the individual that’s unable to do so.
Neil
And a trust is an ecstatic thing. I think people that have a trust don’t understand that there are laws that change, there are situations that change within their own lives and within the people that are in their beneficiaries. So how often should a trust be reviewed and updated?
Jan
I think that depends on the circumstance of the individuals. So for most individuals, I would say a review every five years is appropriate. Laws can change, circumstances can change, things may happen that you forget about, and you need the trust to be updated so that it’s current and that what the document reads in the event that you were to pass is how it is that you wanted to read instead of something that you might have thought of 20 years before and didn’t go back and update.
Neil
And finally, we’ve had a fairly substantial overview of the process of a trust, what it is and what it will accomplish. Why do you think most people tend to put this off, Jan? It seems like this is something in life that never rises to the top of, I need to get this done.
Jan
Oh, that’s a really easy answer. We have a questionnaire that we submit to clients that come in that agree to hire us for an engagement of the creation of a trust. And inevitably what ends up occurring is that questionnaire is probably the most difficult thing for the individuals to get through. And the reason is because it forces you to think about your own mortality and what it is that you want. But in order to do that, you have to view the world in the position where you are not in it any longer or you are incapacitated. And those are things that people don’t like to think about. So it is a very, it is a very difficult situation, but it’s very important so that the loved ones around you in the event that something happens to you, have direction, have a standardization, have a plan, as opposed to the chaos that an unexpected death can bring.
Neil
It also allows you to express your actual wishes in every aspect of your life and what happens afterwards.
Jan
Exactly.
Neil
Thank you Jan.
Jan
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