How and when to establish a living trust

By Katie Martens

Abstract: what are trusts and how they fit into your overall estate plan.

Like forming a business entity, trusts are often misunderstood. I’ve had many clients tell me they need a trust because they want to avoid taxes - I had to break the news to them that despite their mysterious air about them, trusts do not help you or your loved ones avoid paying taxes.

In this article, let’s dip our toes into the trust waters - what is a trust? Why use a trust? How to set up a trust?

What is a trust?

A trust is an estate planning device, built on the transfer of property to one or more beneficiaries from its living trustor. Let’s equip you with some vocabulary before we get any further:

1. Grantor/trustor = the person setting up and transferring property into the trust

2. Trustee = the person or entity tasked with managing the trust according to the terms specified by the grantor/trustor

3. Beneficiaries = those people or entities who are to benefit from the property transferred to the trust

Over the years, trusts have developed for specific needs, like a child with special needs, or credit shelter trust. Perhaps that’s where people get the idea that they can shield their property from taxes by creating a trust. Although this is beyond the scope of this article, please be aware that a credit shelter trust is only used if your total worth reaches the federal estate tax limits, which is currently $23.4 million for 2021 and $11.7 million for individuals.

Generally, trusts are divided into 2 camps: revocable and irrevocable. They look exactly the same except for one thing: if the trust is revocable, the person making the trust (trustor/grantor) can alter, amend, change, or eliminate provisions in the trust. Irrevocable trusts cannot be altered by anyone, no matter the reason. Here’s how I think of it:

Revocable trusts are like documents written with pencil and paper - the trustor/grantor can always take an eraser to whatever provisions they didn’t like, while they’re still alive.

Irrevocable trusts are like documents written in pen - no one can erase it or modify it. There are, clauses you can include in an irrevocable trust to allow for alterations, but the person making the trust needs to be very specific about what can and can’t be done when altering the terms of an irrevocable trust.

Why use a trust?

If you noticed earlier in this article, I described trusts as an estate planning device. When you consult with an estate planning attorney, and discuss your assets, debts, and wishes, the estate planning attorney will be thinking of powers of attorney, wills, and trusts as vehicles to achieving whatever you want done with your assets and debts after you die.

Trusts are often used to avoid probate, and to achieve a quick transfer of assets to beneficiaries. For example, if someone left all of their property in a trust, their loved ones wouldn’t have to go to probate court to have the court supervise the administration and distribution of the decedent’s assets and debts. Instead, the trustee of the trust would distribute according to the terms of the trust. The difference can be between months and years in probate, to weeks with a trust.

While that sounds appealing, the work involved to get to a place where all assets that should be in a trust actually IN the trust involves quite a bit of legwork. I often ask potential estate planning clients how they feel about paperwork if we’re looking at setting up a trust - it’s a lot of paperwork, and if the word “paperwork” alone overwhelms you, you should probably look into alternative estate planning vehicles.

Let’s look at the work involved to get all of your property into a trust. Here is a list of properties that the average person might have:

• Bank accounts - checking and savings

• House

• Investment accounts

• Car

• Children

• Pets

That’s all I could come up with off the top of my head. Obviously, children aren’t property. But if you have minor children, you can designate in your trust how they are to receive your assets if you die before they reach a certain age. If you chose to create a revocable living trust for all of those items in your life, you’d have to:

• Re-name all of your bank accounts - they would no longer be in your individual name, they’d be named in the name of your trust. Let’s go with the “James Harris Revocable Family Trust.” Then, you’d get new checkbooks issued for each of those accounts, and when you signed a check, you’d have to sign as the Trustee for your own trust (“James Harris, Trustee of the James Harris Revocable Trust”).

• Re-title the home in the name of the trust - which means paying an additional filing fee with the Register of Deeds to file a new quit claim deed.

• Investment accounts - be exceptionally thorough with your financial advisor on what is and isn’t supposed to go into the trust when it comes to your investment accounts. IRAs and 401Ks can NOT go into a trust, but the trust can be named as primary beneficiary. This means that when James Harris dies, the IRA funds would transfer to the trust, not to James’ beneficiaries directly.

• The car would have to be re-titled, just like the house. Which probably includes additional filing fees for making the name change from James Harris individually to the James Harris Revocable Family Trust.

• Children are not placed into the trust - but their interest in your assets can be. You can be as specific as you want, no money until they reach the age of 25, or only a set amount to be distributed each year. What you have to keep in mind is that the longer the trust remains, the more fees and costs will be associated with the maintenance of the trust.

• Pets - similar to children, but still considered property by most states. You may want to designate who and how the pet is to be cared for until the end of their days in your trust.

In order for a revocable trust to be effective in eliminating the need for probate, all assets need to be transferred into the trust. That means that if James Harris misses something, no matter how small, like a small mutual fund account created by his Grandma that he inherited and never did anything with, that property will be subject to probate. If this were to happen, it would effectively defeat the purpose of setting up the trust in the first place.

So it’s no surprise that the work involved in setting up a trust ends up costing quite a bit in legal fees, because most attorneys will seek to facilitate all of the transfers themselves so that they have the peace of mind that everything that needed to be transferred did get transferred.

Nevertheless, assets can come, and then can go. If you acquire new assets after setting up your trust, you need to consult your attorney again to re-assess the trust and make sure the new assets are properly titled.

How to set up a trust

If you talked to your bowling buddies about how useful their trusts have been, and you’ve decided maybe you should give this “trust” thing a go, your next step should be to consult with an attorney. The document creating a trust can be complex, and grows more complex with increasing variables, such as children and step-children, or dead spouse and second spouse.

A common adage among attorneys is that you’ll either pay for your estate plan in the beginning, or your loved ones will pay for it at the end. Creating and maintaining a trust is expensive for you, but will likely save your loved ones some headaches after you’re gone. Some states do require a notice to be filed with the court of a trust administration, but again, consulting an attorney is the most important “how-to” step. If you do set up a trust, make sure to communicate your estate plans with your loved ones. It goes a long way to clearing up any confusion on what your wishes are, and how you anticipate taking care of loved ones after you’re gone.