Trusts are essential to legacy planning, yet they can be complex. That’s probably why trust-related questions are some of the most common we get from our clients: what are they, how do they work, and how are they funded? We’ve done whole blog posts on the types of charitable trusts, as well as some interesting observations from a local trust company. This time we connected with our friend and estate attorney, Jason Heinen, about how he explains trusts to clients–as well as the “homework” he sends home with them to get their newly-established trusts fully funded. 

At Apex, we serve a diverse set of clients. We have clients of all ages, estate sizes, family dynamics, and political and religious beliefs. But whether they’re coming to us through a nonprofit organization they support–or they happen upon our website and contact us directly–they’ve likely put off legacy planning, in part, because they’re intimidated by it. They don’t know where to start. They don’t want to talk about death or money. They have a unique family or business situation that they know will complicate their plan.

That’s why we start with the basics, getting to know our clients and putting them at ease. We also help them find the right team of professionals to help bring their plan to life. Sometimes that’s a real estate or insurance agent, a bank, trust company, or representatives from their favorite nonprofits. But because we’re not attorneys and simply educate clients on the planning tools available to them, almost everyone will need to work with an estate attorney to draft the documents that make their plan official. 

We’ve gotten to know quite a few attorneys, and one of our clients’ favorites in the Milwaukee area is estate planning attorney Jason Heinen. As an attorney with the Law Offices of Mark S. Knutson, his expertise runs the gamut from general estate planning to business and real estate transactions to probate support and guardianship petitions. He knows this stuff inside-and-out, but we also appreciate that he’s approachable, explains concepts in a simplified way, and brings humor and realism to his work. 

First of all, it’s important to note that we’re not providing legal advice here. This is a great starting point for learning about trusts: how they work, what assets should be considered for funding a trust, and how to transfer those assets. But you should always consult your financial advisor and an attorney before making decisions about your own plan! If you don’t have an advisor or attorney and aren’t near Jason in Milwaukee, let us know. We’d be happy to make a connection to a trusted partner in your area. 

Without further ado, here’s what Jason has to say about trusts! 

Apex: What’s the easiest way to explain a trust?

Jason: I often use a “shipping box” analogy. Basically, a trust document is a contact between three parties: 

1. A settlor/grantor/trustor. This is the creator of the trust. In our analogy, this is the person sending the box. They decide what goes in the box, and they create the label indicating where it should be sent. Think of the Trust document as this label.
2. A trustee. The person or company that manages the trust. Like FedEx or the postal service, this is the person/group getting the box from point A to point B. They simply follow the instructions on the proverbial label.
3. A beneficiary. This is someone who benefits from the trust; this is the person receiving the box. They’re uninvolved in packing or labeling the box–but they have a vested interest in it arriving safely to their doorstep!

A trust is a legal agreement where you task someone to hold and deliver assets to someone, similar to how you trust a delivery person to hold and deliver a shipping box! Remember though:

“The trust document is just like a shipping label. The label can be super fancy and have all kinds of directions, but if there’s nothing in the box associated with that label, it is like you just wasted a lot of money on postage by mailing an empty box! All this to say is that it’s just as important to ensure that your trust is properly funded, as it is to ensure that your documents are drafted carefully.” 

A few things to note: 

• A revocable living trust is established by gifts made by the settlor/grantor/trustor during their lifetime–hence the word “living.” This shouldn’t be confused with other “testamentary” types of trusts that may be established and even funded only after the grantor has passed away. 
• “Revocable” simply means that the trust can be changed or rescinded at any time during the grantor’s life. He/she can also take as much out of the box as they’d like during their lifetime, if their family dynamics or needs change.
• It is possible for the grantor to also be the trustee and beneficiary of a trust–or for those roles to change at different points in someone’s life.

Apex: That makes sense! So…how do you make sure assets are in the trust–or, ahem–the box?

Jason: There are two basic ways to fund a trust. First is through ownership change, or simply retitling property from the grantor’s name into the name of the trust. The second is through beneficiary designation.

Apex: What types of assets can be used to fund a trust, and which type of action do they require?

Jason: Here’s a list of the assets that are often used to fund a revocable living trust–as well as the way to move that asset. 

• Cash Accounts: checking, savings, money market, CDs (Retitling is preferred for the ease of access by successor trustees, and it places the accounts in the trust now. But beneficiary designation is also an option that can be preferred if your bank requires a new or different type of account for a trust such that ACH and auto-bill pay would need to be re-done. Talk to your bank about these options)
• Brokerage Account (As long as this account is not a tax deferred account, it can be treated the same as cash accounts. Talk to the account manager about the options)
• Stock and Bonds (If they’re tangible certificates, they might need to be reissued into the name of the trust. Otherwise, the account can be treated the same as the brokerage account)
• Personal Property (Your attorney should have created a “transfer document” or “assignment” moving these tangible assets without paper title into the Trust)
• Real Estate (Retitling is preferred to make sure that the asset is in the Trust, but some states, such as Wisconsin, also allow for a beneficiary designation via a Transfer on Death deed)
• Cars (As long as they total less than $50K in value, a change of title is unnecessary, but a similar assignment should be done by the attorney as was done for the personal property) 
• Corporate/Partnership Interest (Talk with your attorney, but the attorney and company will need to coordinate to make sure the interest is transferred into trust or a beneficiary is designated. Many times a buy-out is triggered upon the death of a shareholder, but at the very least you’d want to verify that the company will work with the trustee in regards to that payout)  

Apex: Are there any assets that you advise clients not to put into a revocable living trust?

Jason: Yes! I’d advise against retirement plans–like IRAs or 401(k)s–and life insurance policies being retiled into the name of the trust. It is likely that the Trust should be named as a beneficiary on life insurance policies and Roth IRAs. Naming the Trust a beneficiary of traditional IRAs, 401(k)s, and 403(b)s requires careful planning and specific Trust parameters. Your attorney can and should advise you in all of this, especially when including a charitable organization in your plan. And this is where charitable trusts specifically can hold an important benefit! 

A charitable trust–-such as a charitable unitrust or charitable annuity trust–often can be named the direct beneficiary of these tax-deferred accounts without negative tax consequences resulting when those payout distributions happen after your death. This saves your estate some of the cost of transferring those assets and allows more of your money to be given toward family and the charities you appreciate.

Apex: This sounds a little complicated, but we know that a large percentage of our clients–when presented with all the options–choose to set up trusts. Why are trusts so beneficial to people? 

Jason: Trusts are chosen for many different reasons, but some of the benefits can be:

• avoiding unnecessary costs and time associated with the probate process in the Courts
• expediting distributions to beneficiaries, especially minors
• centralizing beneficiary designations and changes
• protecting assets from the creditors of beneficiaries
• planning around particular tax or medicaid concerns

There are many kinds of trust, and not all trusts will address all of these concerns. But all of these concerns can be addressed in some way through a trust. 

Apex: Anything else people should know about trusts before they set up a plan?

Jason: Just know that law firms function differently. Some attorneys take a more involved role in the funding of the trust, some much less. For instance, I will coach clients through which assets should go in a trust and am happy to be a resource as they work with their banks and financial institutions. Clients should come to our meeting with a list of everything they own–something that Apex can help with. I’m really clear about what responsibilities clients have for ensuring the assets are handled the right way…but whoever you’re working with, be sure you’re clear on who will do what and ensure that every asset is addressed.  Too many clients do not get sufficient direction in this area or do not follow through on the direction they have received; both of these lead to unfunded, or even just under-funded, Trusts, which creates problems and costs that could have easily been avoided with proper planning.