Trust Week, Day Five: Beneficiaries' Rights...and Wrongs

A man will fight harder for his interests than for his rights.

- Napoleon Bonaparte

We’ve talked a little this week about how and when to set up a trust. We’ve talked about grantors powers and trustees authority. We’ve talked about types of trusts. But we haven’t yet discussed the whole reason for creating a trust: the beneficiaries. If you don’t have any beneficiaries, then you don’t need a trust, right? The property isn’t being protected for or from anyone, because there is no one to claim it when the trust ends. Let’s look at some statements made by beneficiaries to find out their role where trusts are concerned.

“The trust is for my benefit, so I’m in charge.”

This couldn’t be farther from the truth. The trust is for your benefit, but it wouldn’t exist if the beneficiaries were supposed to be in charge. Beneficiaries are sometimes given special powers regarding election of a trustee, and they can remove a trustee in certain situations. But in no way do the beneficiaries have any right to dictate how trust property should be used or managed.

“Okay, so the trustee is in charge. That means I have to take what the trustee decides to give me.”

Once again, off the mark. The buck seldom stops with the trustee. In truth, the person in charge is the grantor. He or she created the trust by choosing what terms to include in the trust document. Sometimes that involves giving the trustee discretion. In many trusts, a beneficiary is given the right to request distributions from the trust. It is not uncommon for the grantor to require that a trustee make a minimum annual distribution to the beneficiaries. Always, always, always read the trust document to determine if the trustee is being fair. And remember, the trustee owes fiduciary duties to you as beneficiaries. If he violates those duties, he can be held liable.

“Nice! So, when the trustee does something I don’t like, I can sue him!”

You just keep missing the mark. You’re like a blindfolded orangutan firing a Civil War era rifle.

Sorry about that.

The trustee owes the beneficiaries certain fiduciary duties, but he or she still has a lot of latitude when it comes to managing the trust assets. Courts are hesitant to second guess business judgment of a trustee who is at least marginally familiar with managing the types of assets owned by the trust. However, if the trustee treats certain beneficiaries differently than others (without special instructions from the trust), or if he or she is mixing trust funds with personal funds, legal action could be used to force the trustee to comply with the duties of loyalty and prudence. Again, you can be certain that the trustee is doing his job if you check the terms in the trust document. And seek counsel from an attorney.

It’s been fun discussing trusts with you this week. Hopefully you’ve gained some understanding of what a trust is and how it might play an important role in your estate plan. If you have additional questions or would like to schedule a free initial consultation, give us a call or fire off an e-mail.

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Lawyer Joke of the Day:

Five signs you need a new lawyer:

3. When the prosecutors see who your lawyer is, they high-five each other.

Trust Week, Day Three: Funding

If trust were a living creature, it would be on the endangered species list.

- Unknown

In order for a trust to be effective, that trust must be funded. In this context, “funding” means that the grantor must transfer some amount of property into the trust. Any property that is not owned by a trust will not be controlled by the trust’s terms. So, what do you need to do to fund your trust?

Sometimes, funding a trust means transferring land to the trustee. To accomplish this, the grantor will need to execute a deed transferring the land. In some states, this deed will say “to (Name of Trustee) as Trustee of the (Name of Trust) Trust.” Some states will allow language like, “to the (Name of Trust) Trust.”

Other times, funding a trust will involve changing title on your CD’s or investment accounts. This will involve contacting your investment company or bank and informing them of your intentions regarding the accounts you hold there. Many investment companies will have departments devoted entirely to making sure trusts contain the necessary language and making sure the necessary title changes get made. Often, the grantor will need to sign an authorization for the trustee as well as a change of title.

Finally, funding a trust might be as simple as listing an asset on the schedule of assets at the end of the trust. Assets that this approach would work for would include assets that don’t require a title to own like antique furniture or a coin collection. Other assets that might fit this category could include foreign currencies or precious metals.

If you are considering creating a trust, make sure to ask your attorney about how your trust will get funded. Failure to fund a trust is the single most common mistake a grantor can make and the error that is the most fatal to a newly created trust.

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Lawyer Joke of the Day:

Five signs you need a new lawyer:

5. He tells you his last good case was of Budweiser.

Trust Week, Day Two: Types of Trusts

When people ask me why it’s so hard to trust people, I ask them why it’s so hard to keep a promise.

- Unknown

Last time, we talked about what a trust is and some of the things a trust can do. We mentioned a few reasons for why you might create a trust. At the end, I indicated that there were many different types of trusts; I’d like to spend some time today talking about the many different varieties.

There are two basic categories under which trusts fall: revocable and irrevocable. When someone creates a revocable trust, they retain the power to change or cancel that trust at any time and for any reason. Retaining that power allows the grantor to change their mind about how the trust works, what the conditions placed on the beneficiaries should be, and even whether to use a trust at all. If such a trust is revoked, the property is returned to the grantor and he is returned to the position he was in prior to creating the trust, generally speaking. In my list of six essential estate planning documents, the second item listed is typically written as a revocable trust.

An irrevocable trust is one that, once created and signed, cannot be changed or cancelled. It is a permanent creation and will continue its existence until all of its terms and conditions are completed and satisfied. Sometimes, revocable trusts become irrevocable upon the occurrence of certain events such as the incapacity or death of the grantor.

The revocability of a trust is typically what determines its usefulness. A revocable trust allows the grantor to use a trust to design an estate plan that provides a great deal of flexibility. So much so, that many estate planners utilize a revocable trust where a will has previously been the standard. This is especially attractive because using a trust instead of a will eliminates the need for probate on the assets within the trust.

However, by creating an irrevocable trust, the grantor can shelter assets from creditors or from estate taxes. For example, an irrevocable life insurance trust owns a life insurance policy on the grantor’s life, but protects the proceeds from estate tax for the benefit of the grantor’s chosen beneficiaries. Irrevocable trusts are often used in planning for end-of-life concerns like long-term care. Caution must be used, however, because placing property into an irrevocable trust constitutes a gift that may be subject to federal and state gift taxes if not done correctly.

There are many other ways to describe types of trusts:

• A testamentary trust is created within a will. It does not shield assets from probate or from estate tax, but it does help define what, when, and how the grantor’s heirs receive their inheritance.

• A special needs trust or supplementary needs trust provides support to a disabled or aging individual. Such a trust can be created in a way that allows the beneficiary to receive federal and state support along with support from the trust. Someone familiar with those requirements can tell you more about the necessary terms.

• As mentioned before, an irrevocable life insurance trust owns a life insurance policy on the grantor. With careful drafting, the grantor can pay the premiums on that policy while still protecting the insurance proceeds from estate and inheritance taxes.

These examples are just a scratch on the surface of the types of trusts that exist. Some of them require so much explanation that they would require at least one full blog of their own. Within the myriad types of trusts, there are even more numerous clauses and terms that are used. Later this week, we’ll touch on some of the more common trust terms. (I know, it’s not fair to pique your interests so much. You’ll just have to find a way to contain your excitement.)

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Lawyer Joke of the Day:

Q: When lawyers die, why don't vultures eat them?
A: Even a vulture has taste.