Basic Trust Information (Trusts 101)

Disclaimer: I no longer practice law, and nothing herein is intended to apply to any specific person's legal needs. Trusts are useful tools, but that does not mean that a trust is right for anyone who happens to read this article.

This class is intended for any adults who have assets, or who might ever have assets, or for those who have children or might ever have children. The rest of you may resume recess and are excused, provided that you agree that your estate will have nothing more valuable than the new flat panel TV in your home. [Note that even your death, if caused by someone else, could lead to a significant asset for your estate.]

I don't mean to be facetious; I'm serious. Everyone needs to know about something called a Trust. You might not need one, or want one, but you should know about the concept.

There is so much one can do only with a trust. For one thing, most trusts may include some kind of spendthrift protections, which prevents a beneficiary from blowing the value of the trust. To illustrate the need, consider that Max Mogul inherited over $100,000 when he turned 18. It all was gone within a year – and that includes the expensive car which he managed to wreck only 6 weeks after he bought it.

Not many 18-year-olds have the maturity to deal with a lump sum of significant value, yet (absent a trust), that may be the age at which they inherit. In some states they may inherit at 21.

If for no other reason, I think that parents of children should leave their assets to the children "in trust," i.e. tied up so that immature youngsters cannot blow the assets. A simple clause in a will might suffice: I leave my worldly assets [but not "other worldly assets"] to my trustee, in trust, for the benefit of my loving spouse for as long as he/she survives, and then for the benefit of my issue [legalese for children and their children] until I have no living child under the age of one hundred years [or some such reasonable age].

Frankly, I would not expect a child of 100 years or more to lose the entire family fortune in Las Vegas in one week. And if he/she did, more power to the youngster.

The fact is that the person making the trust can determine the age or circumstances that cause the termination of the trust. It might be some younger limit, such as age 45, or some factor such as the marriage of a child or the birth of a child's first child, etc. The goal here is to prevent any person from receiving a significant sum of money (or other property) when that person is not equipped to handle it, all while retaining the spendthrift protection.

Trusts can extend beyond the first generation. This fact becomes extremely important for those with large estates and for those with children having particular disabilities. For example: I direct my trustee to apply so much of the principal and income of the trust for the benefit of my physically/mentally disabled child as my trustee shall deem appropriate in its/his/her sole discretion, for as long as said child shall survive, and thereafter to distribute the balance of the corpus of the trust to my issue by representation.

It is possible to pay out the income on a regular basis, either equally or unequally, or not to pay it out, or to pay out some, or to pay out income and principal, etc. The amount of the distributions may be set, or it may be left to the discretion of the trustee, or it may be subject to some other determining factor. There really is incredible flexibility.

Suppose a person has children and wants to leave property to someone who is not the parent of those children. Possibly the best means to accomplish that goal and still to protect the children is through a trust: I leave it all to my trustee, in trust, to benefit my good friend Foxie Floosy for as long as she survives, and then to my issue by representation.

In that way, if Foxie dies a week after the Trustor, his property does not go to her illegitimate children nor to her estranged husband in Argentina. It goes to the Trustor's children.

One common misconception is that property tied up in trust really isn't available to the beneficiary – that somehow a parent who leaves his/her estate in trust is punishing the child. In fact, that idea is wrong, although it may depend to some degree on the terms of the trust. Most trusts give the Trustor some discretion. Furthermore, the Trustor may be permitted to use the principal of the trust.

Suppose for example that the beneficiary of the trust wants to buy a home, but his/her assets are "tied up" in a trust. It is possible for the trust (acting through the trustee) to actually purchase the home for the benefit of the beneficiary. The money gets used just as if it were not in trust, yet there still is spendthrift protection. Such a home may be "owned" by a trustee, but it is the beneficiary who lives in it and who enjoys all the benefits of ownership.

A trust can be very simple to establish, or it can be very complex. There are living trusts and there are testamentary trusts; there are funded trusts, and there are unfunded trusts; there also may be springing trusts, contingent trusts, charitable trusts, and life insurance trusts, etc. Essentially, there are an infinite variety of trusts, and there probably is one that would do exactly whatever you would want to do with your assets. The real issue is determining what it is that you would want to accomplish.

The next issue is determining who should be your trustee. It could be a bank, a spouse, a friend, or even your children (as co-trustees), but that issue is always one requiring a great deal of thought.

Then, of course, there is the expense of creating the trust. It might be a minor expense, such as for a simple testamentary trust, or it could be a major expense. Some attorneys charge more than others, and some do a better job than others. However, most of the language is similar and based on published forms which lawyers use. It's listening to you and then knowing how to apply those forms to your wishes that causes some attorneys to do a better job than others – although not necessarily being more expensive.

So is it worth it to you to have a trust? I don't know, but you should think about the issues I've raised and see how close you are to accomplishing your goals. That ends our class for today, but I will stay late to try to answer general questions.

© 2008 Lou

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