Estate planning attorneys use trusts to solve all sorts of problems for their clients. Any time there is a trust, there must be a trustee – the person who manages the assets in a trust. This post, along with the next several ones, will talk about what it means to be a trustee.
Wait, what’s a trust again?
A trust is an agreement in which the grantor designates a trustee to manage assets for the beneficiary. One person might fill more than one of these roles. In a revocable living trust (“RLT”), for example, the grantor starts out as the trustee and the beneficiary. But, over time, when the grantor can’t serve as trustee anymore, a backup trustee will step in. And when the grantor dies, the children or other heirs will benefit from the trust.
The grantor establishes a trust by preparing a trust document. This might be someone’s Will, or it might be a stand-alone document. In addition to the trust document, the trustee has to follow state and federal law in administering the trust.
Types of trusts
Estate planners establish trusts for a variety of purposes, but attorneys frequently use a few common types :
Living Trust: The grantor establishes a living trust while he or she is living, thus the clever name. Living trusts are either revocable or irrevocable. The grantor can change a revocable trust while he or she is still alive. We use RLTs to avoid needing to go through the probate process, to deal with periods of incapacity, and to spell out and usually restrict how assets should be inherited by the next generation. Planners might use an irrevocable living trust to hold life insurance so the proceeds aren’t subject to the estate tax. Or, a grantor could use an irrevocable living trust to make a managed gift to a loved one during the grantor’s lifetime.
Testamentary Trust: A testamentary trust is established in someone’s Last Will and Testament. Typically, planners use them to control the distribution of assets following someone’s death.
Charitable Trust: A grantor can establish a charitable trust to take a charitable deduction on his or her taxes, while still being able to make use of the donated property during his or her lifetime. An example is the Charitable Remainder Annuity Trust or CRAT. The grantor puts property in a CRAT for the trustee to manage. The trustee pays the grantor an annuity each year for a particular time period, or for life, and whatever money is leftover in the CRAT at the end goes to charity.
Special Needs Trust: A special needs trust is created for a person who is receiving government benefits (like medical assistance for a developmentally disabled person). If you leave an inheritance directly to someone on government assistance, they will usually lose that assistance until they spend your inheritance. If you use a special needs trust, instead, the government ignores the inheritance and continues to provide assistance to the beneficiary.
In the next post, we will talk about the legal duties owed by the trustee.
