Ins and outs of Trusts

Hello All,

I really can’t count the number of times I have heard investors ask about what are trusts, and how they can be used to help them with their assets.  And for this reason, I have decided to write about the basics of trusts, so that you have a better understanding of what trusts are and how they can be used in both asset protection and estate planning.

Before I go on, I need to inform you that I am not an attorney, so the information that I am presenting is not legal advice, just information.  If you have any further questions, I advise you to seek qualified legal counsel-preferably an attorney focused on estate planning, and is well versed with trusts.  (All attorneys know about trusts, and many might say that they can help you, but just like a general practice doctor knows about your heart, wouldn’t you rather have a heart specialist perform heart surgery over the general practitioner?)

Even though many historians can not agree on who initially originated the concept of trusts, many do agree that Alexander the Great implemented them, when he was setting off to go to battle for his country; now I don’t know if Alexander called it a “trust” during his time, but what is known is that the concept of the trust that is used today has not changed from the times of Alexander the Great.  It has been said that just before going off to battle, Alexander the Great would give orders to one of his trusted advisors regarding how all his assets and riches were to be divided, if he were to get killed in battle.

That is all that a trust is.  A set of instructions given to someone that is trusted to perform the instructions upon their death.  In other words: there are three (sometimes four) parties that are needed to have a valid enforceable trust.

1. Grantor/Owner: This is the person that owns property, be it real property or personal property (chattel) who wants their property to be distributed/managed a specific way for the benefit of their named survivors.
2. Trustee: This is the person or business entity that the grantor trusts to perform their wishes, and trusts that they will act on the grantor’s best interest and will follow their instructions.
3. Beneficiaries: These are the named survivors that the granter wishes to benefit from their assets, upon the grantor’s death.
4. Director (OPTIONAL): This is a entity (person or business) that acts upon the interests of the beneficiaries.  Generally a director is named and put into place when the beneficiaries are not capable of making decisions, either due to under aged beneficiaries or due to mental ailments, which prevent the beneficiary from making decisions that are in their best interest.  The director will direct the trustee, upon the death of the grantor, when the trustee needs a decision made regarding the execution of all or part of the trust instructions.

Other than the parties involved in the trust, you need to have:

1. Assets: This is the real and/or personal property that the grantor wants to give to the named beneficiaries upon their death.
2. Trust Document:  This is the set of instructions that is given to the trustee, from the grantor, identifying what the grantor’s intentions are regarding the distribution/management of the assets.

Now that we have identified both the actors for a trust (grantor/trustee/beneficiaries/directors) and that you need assets and a set of instructions (trust document,) let’s go through the steps of creating a trust.

1. Grantor has assets that they want to give to someone else, upon their death.
2. Grantor creates a set of instructions (trust document) that outlines how the assets are to be divided/managed and who will gain benefit from the assets.  The grantor can at any time modify the trust document, including adding and removing beneficiaries and assets.
3. Grantor “funds” the trust, by listing the personal assets in the trust document, as well as transfers the title of assets that have titles/deeds, such as real estate, cars, boats, etc.  (if it has a title/deed associated with it, the named owner needs to be changed from the grantor to the trust’s name.)  At this point the grantor no longer is the owner of the assets, but the trust is.
4. The grantor gives the trust document to their trustee, to be held until the death of the grantor, at which time will be executed.  Please note, that the grantor can change trustees at any time, so don’t think once you have assigned a trustee, you are stuck with them.

As you can see, the steps of creating a trust is simple, though again, drafting a solid trust document is crucial to ensuring that your wishes are performed according to your intentions and that you reduce the chances of the trust document being challenged.

Now, you might be asking why many of the real estate gurus out there say that you should put your houses into trusts, since it appears that trusts are great for estate planning, and you have no intentions of leaving this earth in the near and distant future.

The answer to that question lies under step #3 of creating a trust.  In this step you transfer the ownership of the asset from yourself to the trust, which means that you no longer own the asset, the trust does; or in other words, if you were to be named in a lawsuit, and a judgment was awarded against you, the assets would be protected from the lawsuit, since only assets that you own can be affected.  Since you don’t own the assets that were transferred into the trust, they are free from the burdens of your judgments.

I do need to express to you that the asset is not free and clear from ever being involved with a lawsuit, as if the asset is real property, and someone had a lawsuit against the property, such as someone tripped and hurt themselves on the real property, then the trust (owner of the property) of the real property could be sued and damages awarded against the trust.  That is the reason that many real estate gurus say that you should have only one property in a trust, so that other unrelated properties are not in peril if one of the properties is named in a lawsuit.

Now, I need to mention that even though there are three (or sometimes four) actors required to have a trust, I did not say that every one of those actors needs to be someone different.  They all could be the same person, if you really wanted it to be, though the courts might disregard the trust all together, if you are the grantor, trustee and beneficiaries of the trust.  Remember that the trust documents are not recorded or public, so the only way the courts could be aware of you hold all three positions, would required you to make this information publicly known, here’s a suggestion-DON’T!

Until next time-Best of luck in your investing!

Michael.

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