We brought in one of our clients’ favorite estate planning attorneys, Jason Heinen, at the Law Offices of Mark S. Knutson to share the basics about trusts: how trusts work, what assets should be considered for funding a trust, and how to transfer those assets.
While Jason is a licensed attorney, you should always consult your financial advisor and attorney before making decisions about your own plan!
How does a trust work?
“I often use a shipping box analogy when thinking about a trust,” Jason says. “It’s contract between three parties:
- A settlor/grantor/trustor 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.
- A trustee is 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.
- A beneficiary 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!”
A trust is useless if it doesn’t contain assets.
“The trust document is just like a shipping label,” Jason adds. “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! It’s just as important to ensure that your trust is properly funded as it is to ensure that your documents are drafted carefully.”
What Are the Benefits of Trusts?
- avoid unnecessary costs and time associated with the probate process
- expedite distributions to beneficiaries, especially minors
- centralize beneficiary designations and changes
- protect assets from the creditors of beneficiaries
- plan around particular tax or Medicaid concerns
Revocable Living Trusts vs. Testamentary Trusts
A revocable living trust is established by gifts made by the settlor/grantor/trustor during their lifetime–hence the word “living.”
A testamentary trust may not be established–or even funded–until after the grantor has passed away.
Revocable means that the trust can be changed or rescinded at any time during the grantor’s life.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 trust 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.
How Do You Fund a Trust?
- Through ownership change, meaning, retitiling property from the grantor’s name into the name of the trust.
- Beneficiary designation.
What Assets Can Be Used to Fund a Trust?
Here’s a list of assets that are often used to fund a revocable living trust–as well as the way to move that asset:
1. Cash Accounts: checking, savings, money market, CDs.
Retitling is preferred for 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.
2. 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.
3. 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.
4. Personal Property
Your attorney should have created a “transfer document” or “assignment” moving these tangible assets without paper title into the Trust.
5. 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.
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.
7. 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.
What assets shouldn’t be put in a trust?
Jason advises against retirement plans–like IRAs or 401(k)s–and life insurance policies being retiled into the name of the trust. 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 parameters. Your attorney should advise you in all of this, especially when including a charitable organization in your plan. And this is where charitable trusts can be useful!
A charitable trust–such as a charitable unitrust or charitable annuity trust–can often be named the beneficiary of tax-deferred accounts without negative tax consequences from payout distributions that happen after your death. This allows more of your money to be given toward family and the charities you appreciate.
Want to learn more? Check out some of our other blog posts on trusts: the Pros and Cons of a Charitable Trust, Things to Know Before Setting Up a Trust, What Are Charitable Trusts?, What is a Will vs. What is a Trust?