Frequently Asked Questions About Trusts

What Is A Trust?

A trust is a legal arrangement whereby one person (the trustee) agrees to hold property belonging to another (the creator or trustor) for the benefit of a third person (the beneficiary). In a living trust, one person may initially wear all three "hats."

Trust arrangements are more common than you might think. Many homes are financed with a deed of trust. The new owner of the property (grantor) deeds an interest in the property to a trustee (normally a title insurance company) for the benefit of the lender (beneficiary).

The trustee is instructed to deed the property back to the grantor once the loan is paid off. If the grantor fails to live up to his or her obligations, the trustee is instructed to foreclose and sell the property to pay off the lender.

What Types Of Living Trusts Are There?

There are numerous types of living trusts, but they may be divided into two general categories: revocable and irrevocable. A revocable trust can be altered, amended or, as the name implies, revoked at any time prior to the creator's death. Property may be removed from the trust at any time by the creator.

By contrast, an irrevocable trust is "cast in concrete" once it is created. Any property given to the trust becomes trust property. While the character of the property may be changed (e.g., real estate sold and converted to cash), the asset remains in the trust and may be distributed only pursuant to the trust terms.

Any transfer of property to a trust is considered a gift because the owner gives up all ownership rights to that property. Irrevocable trusts are typically set up either to keep life insurance policies out of the creator's estate or to allow a controlled gifting program for children.

Most people want to retain control over their assets. An irrevocable trust may be advisable in some cases for insurance policies and certain high-growth assets in large estates. However, the disadvantages far outweigh the advantages for most people.

Revocable living trusts generally take one of three forms:

  • Standard trust — designed for a single individual or a husband and wife with an estate worth less than the federal estate tax exemption (currently $1 million)
  • A/B trust — designed for a couple with either an estate exceeding $5 million or the need (due to prior marriages) to keep assets separate
  • Q-TIP trust — qualified terminable interest trust designed for estates where each spouse wants to retain control over the distribution of his or her share of the estate

What Happens When I Die?

The answer to this question depends on your circumstances. If you are single, your named successor trustee takes over management of your estate. He/she will distribute the estate property in accordance with the terms you set forth in the trust agreement. If you are married and the second to die, the same rule applies. If you are the first to die and have a standard trust, your spouse continues to administer the property as you are now doing. He/she retains the authority to modify, amend or revoke the trust agreement.

The trust becomes somewhat more complicated if you have an A/B or Q-TIP trust. Your spouse and the successor trustee will divide the property between the A and B trusts and, where appropriate, a Q-TIP or C trust according to the trust instructions. Your spouse will retain full control over the A trust and its property. The successor trustee will administer the assets of the B and Q-TIP trusts per the trust instructions. The latter two trusts are irrevocable. On the death of your spouse, the successor will administer all three trusts and distribute the assets per the trust instructions.

How Does My Successor Take Title To My Property?

It is typically quite simple to pass title to trust property. Normally, your successor will only need to produce a copy of your death certificate and either the trust or a notarized summary from your trust attorney. These are delivered to the bank, transfer agent or title insurance company.

You are the key to making this a smooth transaction. If you placed your titled property in the trust and maintained a record of that property, your successor will have an easy and inexpensive task to complete. On the other hand, if you failed to maintain the proper records, he/she may be forced to employ professional help to clear title.

Can My Trust Be Challenged In Court?

Any legal document can be challenged in court. However, an agreement is presumed to be valid unless proven otherwise. The courts are more prone to uphold a trust than a will. The challenger is faced with the possibility of paying the trust's legal fees if the case is brought in bad faith. Additionally, the trust usually provides that anyone who, without cause, challenges the validity of the trust forfeits his/her rights under the trust.

Neither the government, the courts nor the legal profession will challenge your living trust. The government is concerned only that taxes are paid. Since this document is not designed to evade taxes, the government is happy. The courts have more than enough to do and are happy that you are not clogging up their dockets with another probate. Even if the legal profession had some standing to challenge the living trust, which it doesn't, it is not going to make its reputation any worse by appearing to attack a legal means for reducing attorney's fees.

What Assets Should Be Added To My Trust?

Real estate: This is the most common asset that should be included in a trust. The exception might be property owned as a joint owner with right of survivorship.

Financial assets: Large financial assets should be considered as possible assets for the trust. However, you should consider the tax consequences of some of these assets, such as retirement accounts. The trust may be a beneficiary, but not the owner. IRAs have their own rules for succession and you should consult with your attorney and financial adviser before transferring them to your trust.

Business interests: Sometimes these should be transferred to the trust. Check with your CPA, however, especially as it relates to any business that files as an S corporation.