Just What Is a Trust, Anyway?
At Deckert Law, we regularly recommend that our clients consider creating and using trusts to facilitate their estate planning. A trust can seem like a foreign concept to the modern mind. I like to define a trust as both a relationship and a legal entity.
Trust As A Relationship. To understand how a trust is a relationship, it can help to think back to the Middle Ages when the trust first became a legal concept. Knights were heading off to the Crusades and leaving their families behind. Imagine the knight, in his full suit of armor, about to get on his horse and ride across the drawbridge into the sunrise, with his wife and children standing by the gate watching his departure. The knight does not know if he will ever return, and it is important to him to ensure his family is cared for. He therefore calls his trusted servant and gives that servant the keys to his castle and his chest of gold. “I ‘trust’ you,” the knight tells the servant, “to care for my property and manage it for the benefit of my children.”
The law came to recognize this scenario as creating a legal relationship. A trust is, at its core, a legal relationship between the creator of the trust, the manager of the trust, and the beneficiary of the trust, under which the creator of the trust gives authority to (or “trusts”) the manager of the trust to manage the assets of the trust for the benefit of someone other than the manager.
Trust As A Legal Entity. A trust is not just a relationship. The law recognizes that the creator-manager-beneficiary relationship actually creates a separate legal entity. My grandparents, for example, have a revocable living trust, which is the trust we usually recommend to our clients. In the eyes of the law, there are three legal entities – (1) grandpa, (2) grandma, and (3) grandpa and grandma’s revocable living trust.
Before this gets too confusing, think back for a moment to the relationship nature of a trust. It can be helpful to think of each person in the relationship as a hat (the creator/settlor hat, the manager/trustee hat, and the beneficiary hat). Since grandpa and grandma have a revocable living trust, they are wearing all of the hats during their lifetime – the settlor/creator hat, the trustee/manager hat, and the beneficiary hat). Put another way, my grandpa and grandma created a revocable trust, under which they manage all of their own property during their lifetimes for their own benefit. If that seems circular, it is because it is circular. My grandparents’ lives do not look or feel any different than they would without a trust.
Nonetheless, the law treats their revocable living trust as a separate legal entity – essentially a separate person – even though they have all of the managing control and are the only people who benefit from it during their lifetimes. Creating a trust can give you and your family many benefits. Here are three of them:
- Probate Avoidance. A trust does not die when the creators of the trust do. The trust therefore does not have to go through the probate court process if it is set up and funded correctly. To understand whether a trust is formed and funded correctly, think of the trust like a bucket. When I create a trust, the bucket, so to speak, is in existence, but it is empty. I have to take my real estate and most of my financial accounts and either (1) put them into the bucket or (2) give legally recognized lifetime instructions for them to be put in the bucket when I pass away, for the trust to control them. If I do not put assets in the bucket, the bucket will not be able to control them automatically – the asset might have to go through probate.
- The trust does not get sick and become unable to make decisions when I do. My backup trustee will be able to pick up right where I left off without getting a court involved.
- Asset Protection from Creditors and Taxes. The trust may not be liable for certain kinds of debts and liabilities after I pass away, providing protection for my beneficiaries. I can do things with trusts that I cannot do any other way (at least here in Minnesota). Some of those benefits are (1) protect assets from creditors for my beneficiaries, (2) complete certain types of Medical Assistance planning, and (3) create special trusts to alleviate or eliminate estate taxes.
-Posted by Joseph T. Pates