Estate planning

A trust is a legal, fiduciary arrangement in which one party (the grantor or trustor) provides a second party (the trustee) with the right to hold legal title to property and to manage the property for the benefit of a third party (beneficiary). When you create a trust, you make a legal arrangement that gives your trustee power to hold the assets you place in the trust for the benefit of one or more beneficiaries.

A common example is when parents create a trust for their children. The grantors of the trust (mother and/ or father), create and fund a trust for the benefit of their children (the beneficiaries), and appoint an individual or financial institution (the trustees) to manage and administer the trust assets on behalf of the children.

Trusts include provisions that dictate how the trust assets are to be used on behalf of the beneficiaries. The trustee is legally bound to manage and administer the trust according to these provisions. For example, a trust may direct the trustee to distribute income to the trust beneficiary on an annual basis while granting the trustee the discretion to distribute principal only for purposes of the beneficiary’s health, education, maintenance, and support.

A trust may be revocable or irrevocable. Revocable trusts are usually created during a grantor’s lifetime and often serve as a companion to the grantor’s will when creating the estate plan. An irrevocable trust may be created during a grantor’s lifetime or at death as an outcome of the grantor’s estate plan.

A revocable trust, also referred to as a living trust, serves as a means of holding legal title to assets. Instead of titling an asset in the grantor’s name directly, the asset is titled in the name of the grantor “as trustee of the revocable trust.” Because the trust is “revocable,” the grantor may change the trust at any time. The grantor may also add assets or remove them from the trust, as the grantor wishes, with no tax consequences.

Titling assets in the name of a revocable trust provides certain advantages, including:

An irrevocable trust is usually created by the grantor to benefit others. The trust may be created during the grantor’s lifetime to receive gifts for beneficiaries such as a spouse, children, or charities. Although the grantor may retain some control over the irrevocable trust through the terms established in the document, the trust generally cannot be changed in any meaningful way. An irrevocable trust may also be created at death through the decedent’s testamentary estate plan to receive assets upon the grantor’s death.

Irrevocable trusts provide certain advantages, including:

A trustee’s specific duties are unique to the trust agreement and are dictated by the type of assets held in the trust. The trustee you choose will protect your assets, caring for them as you instruct in your trust agreement, while serving the interests of the beneficiary or beneficiaries you name. You can make your trustee’s responsibilities as broad or as limited as you want within the confines of applicable law. At a high level, a trustee has two responsibilities: managing trust assets and administering the trust per the trust document.

Responsibilities include:

A trustee serves as a fiduciary to the trust beneficiaries. A fiduciary is a person or institution that acts on behalf of another while being legally and ethically bound to put the interests of the other above their own.

A trustee may not favor one beneficiary over another unless allowed to by the trust document.

A trustee is tasked with managing trust assets under the Prudent Investor Rule. This rule requires a trustee, acting as a fiduciary, to be impartial when considering both the income needs of the current beneficiaries and the preservation of trust assets for the remainder beneficiaries. This includes a focus on asset diversification, minimization of fees, and the balancing of income generation and capital appreciation.

A trustee is responsible for administering the trust during the life of the trust. Responsibilities may include one or more of the following:

• Making mandatory or discretionary distributions of income or principal to trust beneficiaries as directed by the trust document. The distribution powers included in the trust by the grantor may be flexible or very restrictive.
• Keeping accurate records and filing necessary reports, including filing annual federal and state tax returns and paying any resulting taxes.
• Communicating regularly with trust beneficiaries and responding to beneficiary requests.

Choosing a trustee isn’t a popularity contest. You’re asking someone to willingly take upon themselves a fiduciary responsibility over trust assets as well as the potential liabilities that come with a fiduciary role. It’s a commitment of time and effort lasting for the term of the trust. The important consideration in choosing your trustee is not so much what the duties will be as how your trustee will carry them out. A trust is only as effective as the trustee who oversees it.

You may appoint an individual, such as a family member, or a financial institution to serve as a trustee. Alternatively, you may appoint both to serve as co-trustees. An advantage of appointing a family member is that the trustee will have some knowledge of the family and any personal issues that should be considered when administering the trust. Advantages of using a financial institution includes professional management and administration of the trust as well as continuity in the role of the trustee.

Appointing a financial institution also shifts the fiduciary responsibility of trusteeship from the family to an institution that is prepared to accept the role. Keep in mind that in addition to selecting primary trustees, you’ll need to consider successor trustees. These are individuals or institutions that will succeed the primary trustees if they are unable or unwilling to serve.

A good trustee will have the following qualities:

• Unquestioned integrity and good judgment
• Financial competence and level of experience with the assets entrusted to the trust
• Willingness to serve as an objective and impartial fiduciary
• Ability to make difficult decisions
• Organizational skills and attention to detail
• Good communicator

Invest the time necessary to select your appropriate trustees. This is a role that carries the fiduciary requirement to make all trust decisions in the best interests of the trust beneficiaries.