The Structure and Purpose of Living Trusts
Passing assets onto the next generation has been an age old problem. Living trusts were designed to solve this problem in a modern era where complex property rights have been developed, and where individuals wish to control precisely how and when their assets are to be distributed, in a thoughtful and uniquely designed way. Technically, a living trust is a form of ongoing legal title that privately transfers one’s assets to the next generation without going through the public probate court, thereby saving time and money. A trust is created when you have a trustor, a trustee and beneficiaries, and where the trust entity owns specifically described assets, called corpus, that the trustee is directed to distribute or administer for the benefit of the beneficiaries in a particular manner. If you have a trust and you become incapacitated and unable to manage the trust assets during your lifetime, the successor trustee you designated in your trust can continue to manage the trust for your benefit until you recover. To better understand exactly what a trust is, however, it’s helpful to view modern day trusts through the lens of history. Today’s modern trusts weren’t always around, and before trusts there were wills, and before wills …well, there was often anarchy.
Some Historical Context of Asset Protection
Over the centuries various means have been used to dictate who gets what when you’re gone. At times throughout history the king’s spoken word from his deathbed was all that was necessary to bestow an entire kingdom to the favorite son or daughter. Think of that, an entire kingdom, lands, wealth, gold and jewels, the coin of the realm and the coffers of state, and servants and property all passed down verbally by the last whispered words uttered by a dying king! It helped to have witnesses who heard what the king had said, but in some cases, the king’s final words were contested, with nothing in writing to settle any disputes. Often, when the witnessed account of the king’s verbal decision as to who would inherit the kingdom was in doubt, brother would fight brother for the title and the crown, in order to be the next king, and for the right to inherit the power, the wealth of the kingdom, and the right to rule.
Gradually, over time, the king of the land didn’t own everything, and more reliable methods of individual property ownership started to evolve. For many generations only the landed gentry, an exclusive group, owned most of the property and assets. There were entire classes of people, including surfs and peasants, that had very little to pass down to their families, if anything at all. Eventually, however, individual ownership of assets became possible, and the middle classes came into being and began to own property and assets of their own.
The Evolution of Estate Planning
As legal systems in various cultures evolved, so did the methods by which assets could be passed from one generation to another. In early Britain, for example, landowners would actually take a piece of soil from the ground and place it in a jar to evidence the passing of land to their chosen heirs. Whoever possessed the symbolic piece of sod, owned the land. Eventually, a written directive called a will was created, allowing individuals to dictate in writing who should receive their real and personal property when they died. According to Plutarch, wills were first invented by Solon, an Athenian statesman who lived in Greece from 630 B.C to 560 B.C. From those early days when quilled pen was first put to parchment to scribble out write a will, until today when wills are typed and then speedily spun out of laser printers, wills have been the traditional way by which a decedent’s last written wishes were made known. But wills are public documents and have serious limitations, which have become more and more apparent over time.
As increasingly complex types of property ownership came into being, and as the public probate courts, whose job it is to interpret and verify the wills for the masses, got more crowded and expensive, the disadvantages and limitations of wills became more evident. Most wills distribute all of the deceased individual’s assets immediately to all named beneficiaries, regardless of the beneficiary’s age. For example, and 18-year old could inherit a fortune through a will, and without any experience, restraint or supervision, promptly lose it all overnight. Later, the concept of using a will to create a trust after death evolved, so that individuals could require that the assets be held until younger beneficiaries reached an older age, say twenty-five, before they received their funds. But these wills, actually called testamentary trusts, still had to go through the public probate court, and were expensive and time consuming to administer.
It is generally thought that the concept of creating a trust, capable holding equitable title, originated from Roman Law and was put into practice during the 12th century at the time of the crusades under the jurisdiction of the King of England. Eventually, an increasing number of wealthy families and individuals started creating trusts for themselves and their families, and choosing private individuals, called successor trustees, to administer the trusts after their death or incapacitation without having to rely on the public court. If you create a trust during your lifetime, it’s called a living trust, and it lives on after you’re gone. A living trust has a life of its own, like some other legal entities, such as a corporation.
The Process of Creating a Living Trust
These first revocable living trust documents were lengthy and time consuming and expensive to create, however. Before the advent of computers and word processors, only the very wealthy could afford to hire lawyers on an hourly basis to type, from scratch, lengthy trust instruments on paper. Yes, that’s right; there was a time before computers when everything was typed by hand on paper! There was even a time before photo copiers. Back then, when the wealthy client went into the attorney’s office to review his or her hand-typed trust document, which could be thirty pages or more in length, if a single error was found, or if revisions needed to be made, much if not all of the lengthy trust document had to be retyped, page by page, by someone in the lawyer’s office, or by the lawyer himself. Poor old Mr. Rockefeller probably had to make many trips to his trust attorney, and there were probably many painstaking drafts that were hand-typed from beginning to end before the lengthy completed trust agreement could be signed. This all took time, and depending on the lawyer’s hourly billable rate, the process was always expensive. The work required to prepare the hand-typed trust document, conduct numerous office visits, and after taking the time necessary to make revisions and retyping the trust document several times, could end up costing the client a small fortune. But that was okay, because only the wealthy had trusts, and they could afford to pay their lawyers for the lengthy, tedious work.
Trusts Become Affordable for Everyone
It was not until the advent of computers and word processors in the mid-1980’s that trusts finally became affordable for the masses. There were no do-it-yourself trusts online at first, but at least the trust attorney could create a lengthy, complex and fully functional trust document on his or her computer, safely store the standard provisions that would appear in each trust document, and then tailor only individual portions for each client, as necessary. The attorney could utilize a basic trust document again and again without having to create the wheel each time. Revisions to the trust could be made on a computer, and with newly added text for a particular client, pagination would automatically adjust, and a new trust document could be generated and printed out in much less time, rather than hand-typing the entire document from scratch. Thus, with computers, the time required for an attorney to prepare the trust document was greatly reduced, and trusts became affordable, for the first time, not just to the wealthy.
Nowadays, anyone who wants a revocable living trust can visit a lawyer and have one created for a relatively affordable fee. By comparison, even taking into effect inflation, you can pay an attorney today much less to create a comprehensive trust document than what it would have cost John D. Rockefeller to set up a lengthy, hand-typed trust document back in the early 1900’s. Or even better, these days folks who already know what they want to do with their estate can go online and create their own trust and estate planning documents, edit them, and print them all out, on their own without having to pay for an attorney.
Even in this age of technology and convenience, however, you’d be surprised how many people still don’t know who they want to leave their estate to, or how, or when, or upon what conditions, and sometimes discussion with an estate planning attorney can be beneficial. Just because we have all the technology we need to create our own trusts, doesn’t mean we know the answers to difficult family, individual and tax questions. So, even with modern convenient online trust document services, lawyers can still be extremely useful, helping individual clients discuss, examine and explore the available trust, tax and estate planning options. However, for the individual who knows who they want to leave their estate to, and who they want to be in control and manage the trust after they are gone, a modern online solution to setting up one’s own living trust online can be the perfect thing.
So, if you’re thinking of creating a trust online, or even through an attorney, here’s what you have to remember:
Type of Trust: The trust you will create will probably be a revocable living trust. That means you can revoke or cancel it any time you want. It remains revocable during your lifetime. If you want to make changes to your trust, you can revoke or amend any portion of the trust document any time, provided you have the mental capacity to understand and make the change. It’s common for individuals who make trusts to change their minds about who their beneficiaries should be over time, about how old a child should be before they can receive their funds, or about should manage the trust estate as successor trustee, for example. Whenever you change your mind about a beneficiary or successor trustee, you must amend your trust document. Always make sure that your trust document reflects your values and your current wishes, because your document will speak for you after you’re gone.
Parties to the Trust: Every trust must have a trustor (creator of the trust), a trustee, (person who manages the trust), and beneficiaries, (persons who can benefit from, utilize and enjoy the trust income and assets). In the beginning, if you’re like most people, you will be all three of these people. You will be the trustor, trustee and beneficiary of your own trust during your lifetime. Your children or subsequent beneficiaries who will receive your trust estate assets when you’re gone have no rights until they vest and they cannot touch the trust assets until that day comes, because during your lifetime you are the only beneficiary entitled to receive income and enjoy assets. After all, it’s your money, and your children will be lucky if they receive any of it! I’ve advised many of my clients over the years to do their absolute best to try to spend as much of their own money as possible on themselves, in ways that they will enjoy, because if you don’t spend your money, your children certainly will! You’ve worked hard for your money – enjoy it!
Funding Your Trust With Your Assets: Remember that one of the primary purposes of a living trust is to avoid public probate court. Therefore, once you establish your living revocable trust, you must place the title all of your assets into the trust, with certain exceptions. In most cases, you must place your home and any other real estate you own into your trust. If you don’t do this, your property will not be considered a trust asset and it will go through probate. I’ll discuss more about how to do this another time, but for most properties and transfer deed must be signed and recorded in order for your interest in the property to be considered to be titled in the name of the trust.
If you own a business, you must place your business entities, like corporations, limited liability companies and partnerships, into your trust by executing a proper written assignment that transfers your interest in the business into the name of your living trust. When a business is properly assigned into your living trust, the written assignment has the effect, automatically, of placing all of the accounts, inventory, goodwill and business assets into the trust. Therefore, you don’t need to change title to business accounts, if the title to the business itself is properly assigned into your trust.
Rename your bank accounts so that the owner of the account is you, as trustee of your living trust. In this manner, the bank account will be considered a trust asset and will be divided between all of the beneficiaries of the living trust in the manner provided for within the trust instrument. Alternatively, if you choose to leave an account out of your trust, that’s okay as long as you have a primary and secondary beneficiary named on the account. Remember, a beneficiary designated on an account always prevails over a trust or a will, so be careful about naming beneficiaries on your bank accounts because whoever you name will receive the money, whether or not they are a beneficiary of your trust.
Retirement Accounts: It’s usually best to name individual beneficiaries on your IRA, 401k, other retirement account, and also on annuities, and insurance. For tax reasons, the individual named as beneficiary on an IRA can elect to defer the payment of income taxes, where a trust cannot. So, in most cases, best to leave your retirement accounts out of your living trust.
Personal Property, jewelry, furniture and other personal effects: Be sure you sign a declaration transferring ownership and possession of all of your personal property into the name of your trust. That way they are considered to be trust assets and your successor trustee can take possession of the personal items and distribute them according to your wishes.
Benefits of the Modern Trust Process
Today’s modern property rights can be extremely diverse and complex, including stocks, bonds and mutual funds, and intellectual property, trademarks and patents, and land or property ownership rights, including outright ownership, conditional or contingent ownership, easements, timeshares, and fractional property interests. As a result, pay particular attention to transferring your assets to into your trust, and get help from an attorney if you don’t understand what to do. Remember, though, that even if you have a revocable living trust, if you don’t officially transfer the title and ownership to your accounts, properties and businesses into the trust, then those assets may have to go through the public probate court anyway, thereby defeating the purpose of the living trust. By way of analogy, you might say that your trust is like a cargo ship. When the ship sails, only the cargo that was loaded onto the ship will sail with the ship to the intended destination. Anything cargo or assets left on the dock, will stay on the dock, with an undetermined future, until a public probate court can decide who to give them to.
Trust law has evolved a long way from the primitive wills and estate planning methods and documents of earlier eras, but today’s modern trusts are efficient, legal, private and effective. A living trust is a reliable living legal entity that lives on after you are gone. Your trust should contain age and other requirements for younger beneficiaries or special beneficiaries, instructions for your successor trustee to manage and distribute assets according to your wishes, and in a manner that can be accomplished privately and without the intervention or interference of a court. Your trust will work properly only if it is funded with your assets. If set up and funded properly, however, a living revocable trust can preserve your legacy, and allow you to pass on your assets to your loved ones privately, without probate, and in a way that is thoughtfully and uniquely yours.