A trust is a financial agreement permitting a third party, usually a professional trustee like a lawyer, to control assets until the beneficiary is ready to take them. Most times, this wealth transfer to the beneficiary occurs after the death of the individual who set up the trust.
Your average trust functions, like a tax shelter so a grantor, can pay fewer taxes on their annual income.
In addition, once the grantor passes away, it decreases estate tax if there are any owed, and it prevents assets within the trust from ending up in probate court, which happens often.
Trusts are a helpful tool when you want to assign ownership of your assets to an inheritor. It can stay active for many years while sustaining your heir with a stable income, or some never end and get transferred to new beneficiaries.
What Is A Trust?
A trust is a way to manage your assets so that:
- The primary owner (also known as the settlor, trustor, or grantor) of an asset (i.e., savings account, physical commercial building, or land) sends the present or planned ownership and guardianship of the property (the estate of the trust) by utilizing an estate planning form known as a ‘trust instrument.’
- A trust instrument is set up when the grantor is still living or by utilizing the services of a testamentary trust if the person has passed away.
- The assets of a trust change possession temporarily and are cared for by a ‘trustee’ who can also be the grantor if the situation deals with a revocable living trust. Or an individual picked by the grantor in a case where the trust is irrevocable.
- A trustee is financially responsible for monitoring and managing the trust, so it prospers while under their care. Any decision that benefits the beneficiaries of the trust is allowed and encouraged. The trustee’s fiduciary responsibilities begin when the assets are transferred to the trustee. The duties start before the grantor’s demise until the day the custodianship of the trust reaches its end.
Most trusts come with conditions and rules the trustee must follow. Some terms they must adhere to include what they can do with the land in the trust, what kind of investments the trustee can get involved in, when they are allowed to transfer everything over to the beneficiary, etc. The rules are evident in the trust documents.
A Trust Closes When Its Objective Is Achieved
Every trust is different, and they reach their conclusions in various ways. Therefore, the end is contingent on the rules set in the trust document.
For example, some trusts don’t achieve their purposes if the money runs out when the economy hits a recession or if the assets lose their value when the person managing the estate does a poor job.
Revocable trusts are active while the grantor is still alive and is run by the grantor or a person they appoint. The grantor can take back the trust and reclaim control of their assets whenever they choose to do so.
This type of trust is the only one unqualified to receive the tax exemption perks other trusts benefit from when transferred to a beneficiary.
An irrevocable trust comes to an end after the passing of the grantor. At this point, assets are allocated evenly by the trustee to all of the descendants included in the estate.
A grantor can choose a date or create rules as prerequisites before the assets are released. For instance, the grantor can state that funds will not be released until the beneficiary is officially an adult at 18 years old or gets a university degree.
Special Needs Trusts
Any kin or offspring in your household who cannot work because of a disability will most likely need assistants for many years.
According to state and federal regulations, a trust can stay open for a maximum of 21 years after the grantor’s passing. A special needs trust is unique because it remains active during the beneficiary’s lifetime.
In most cases, the trustee will be more senior than the heir, so it’s critical to have a successor trustee in place to oversee the financial estate. Their primary duty is to run it frugally and ensure the assets remain well invested.
The best idea for this kind of trust is to hire a trust company instead of a single individual to run it for you.
Charitable trusts can continue with an unlimited time frame. These trusts have no expiration date, but you still have a choice to add to the terms and conditions if that’s what you want to do.
For instance, the trust documents can state that a specific amount is donated annually until the funds are depleted.
Poor Management And Bad Economic Conditions
A trust can close when no funds are left in the grantor’s accounts. This situation can occur due to mismanagement of funds and the estate itself by the trustee responsible.
If this happens, the trustee enters a legal dispute with the grantor to explain why the assets have been exhausted.
The trustee can be free of the blame if most of the assets are invested in stocks, and the market takes a big hit.
It is safe to say the trustee cannot be sued if this occurs because holdings in this category are volatile and rely on stable economic conditions for good yearly profits. And they are obligated to invest the assets under their care or face a penalty for breaking their fiduciary duty for not earning interest to maintain the estate against inflation.
Lastly, a trust agreement can become null and void if an asset under the estate, like a house, burns down or succumbs to a natural disaster. In this situation, the trust ends, and the trustee is free of all responsibilities in the agreement.
What To Do When The Trustee And The Executor Are Not The Same
Very few estates attached to a living trust will not include a will to make sure there are no disputes after the grantor’s death. (Note: Even if you create a will, it’s wise to have a second one as a fallback in case there is an asset you are unsure you want to be included in the trust.)
At times, the executor of the will and the trustee are the same individual.
However, if you’re the trustee and someone else is the executor, always keep in touch with this person for at least the initial 1 to 3 months.
It’s crucial to keep tabs on the executor so you can know what actions they take and why they are taking them. If you are dealing with a pour-over will, the executor transfers ownership of the assets in the estate to the trust. After that, they become yours to control.
Contacting The Trust Beneficiaries
After the grantor’s passing, the first move is to let the heirs know there is a trust in their name. Begin by reading the trust instrument out loud and ensure they know who else is an inheritor if there are others.
Sometimes trusts are not straightforward because they don’t list the exact name of the beneficiaries and use terms like ‘children.’ Every state has unique laws, so do your research to see what this legal term includes. The best idea is to contact an estate lawyer if you become overwhelmed.
To contact the heirs, start by mailing a short letter letting them know that their trust is officially irrevocable since the grantor’s death. Then let them know they are now in control of the trust assets, and there will be a transfer as soon as legally possible.
In most states, there are deadlines to obey, giving you a specific time frame to contact the beneficiaries. The typical time frame for 70% of the states in America will be anywhere from 30 to 60 days after the trust-maker’s death.
What Occurs When A Trust Ends?
A trust arrangement ends when the assets are dispersed to the people assigned as the beneficiaries. How the money gets distributed is written in the guidelines included within the trust instrument. Any other requirements before the trust can end are included in this document.
It’s the responsibility of the trustee and the heirs to decide how the assets are divided collectively if there is no will.
We recommend you involve a probate lawyer to make this process easier. It’s not mandatory, but it will be much more convenient when you need questions answered about your rights as an inheritor.
There will be cases where the heirs disagree on how to split the assets, and you immediately need to get a lawyer involved when this occurs.
However, before picking an estate planning lawyer, do your due diligence and learn everything about this individual, especially if a lot of money is involved. The ideal attorney will have years of experience in this field and can help be an intermediary for a trust dispute when needed.