Posted by Martin Heller Potempa & Sheppard, PLLC on September 24, 2021
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If you’re in the process of planning your estate, you may be considering creating a trust for your loved ones. At Martin Heller Potempa & Sheppard, PLLC, we believe that trusts are wonderful, misunderstood tools that almost everyone should consider using. They’re not as complicated as people seem to think. This is the first of several blogs discussing trusts. Throughout this whole series, we will be diving fairly deeply into trusts.
What is a Trust?
A trust is created by the “Grantor” (sometimes you still see the old-fashioned version of “Settlor” or “Trustor,” but they all mean the same thing). It is managed in its day-to-day activities by the “Trustee.” The assets it holds can only be used for the “Beneficiaries.”
A Trust exists when the Grantor creates it and the Trustee agrees to serve. Once it is created, it exists and has authority over the assets transferred into it. This is different from a will, which is created when executed but has no authority until later when the probate court admits the will after the client’s death.
Types of Trusts
Trusts are not new and have been a part of the legal system since feudal times. There are many different types of trusts. The type of trust a person needs will vary, as some trusts are good at some things and not as good at others. We could almost construct a 3-dimensional matrix of types of trusts and what they do. There are:
Trusts that the client creates during his/her lifetime and trusts that are only created later upon the client’s death.
Trusts that are designed to protect family wealth for a client’s spouse, children, grandchildren.
Trusts that can provide some reduction of capital gain tax for married couples after the death of the first spouse.
Trusts that protect from estate tax.
Trusts that can protect assets from creditors.
In most cases, a trust can be designed to do many of the items listed above and does not have to be limited to just one of the items. As a side note, in almost every case, with a revocable trust, the client starts out as (1) the Grantor, (2) the initial Trustee, and (3) the beneficiary. This eliminates the concern that the client is giving control of the trust and assets to someone else. So, there is no concern that the Trustee is not following the Grantor’s direction, as they are one and the same.
Written Documents for Trusts
In almost every case, the details of a trust are in a written document, which is different from the trust. It is just the agreement between the Grantor and the Trustee regarding how the trust is to operate. An analogy to this is a business. When a client sets up a business, there are often associated business documents. With an LLC (a limited liability company), there should be an Operating Agreement. The Operating Agreement sets forth how the LLC is to operate and be managed. How many members are there? Which decisions need majority votes or maybe 2/3rds votes? Is there going to be a designated Managing Member, and if so, who? What happens if the LLC terminates? Again, the trust document is like the LLC Operating Agreement, it sets forth the Grantor’s details of how the Trustee is to administer the trust.
Does a trust agreement always have to be written in a document? No, you can have an oral trust in Tennessee, but it is GREATLY discouraged. Of course, the main issue with an oral trust is, without a written trust agreement, how do we know what the provisions are? We need the written, executed document to be sure of how the trust is to be administered.
Can Trusts Be Used Out of State?
Most trusts are recognized as being transportable from state to state if the client moves. This is different from a will, which is particular to the statutory and case law of the state in which the client currently lives. Can a will be executed in one state work if the client moves to another state and dies without updating the old will? Probably, but the family will have some hoops to jump through to get the out-of-state will admitted for probate. A trust has no such problems. Again, because a trust does not need court approval or involvement, there is little need for the new state’s specific laws. The trust will be interpreted under the laws of the state where it was created, regardless of where the client lives at death.
Learn More About Establishing a Trust
Trusts can be beneficial for many people as they’re planning their estate, but they can sometimes be difficult to understand. If you’re trying to decide whether or not to establish a trust to pass assets to your loved ones, let Martin Heller Potempa & Sheppard, PLLC help. We can guide you through this process to ensure that you know everything you need to know about trusts.
Contact us for help and watch out for our next blog post where we will cover more information about trusts.
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