Understanding Trust-Based Estate Planning

Trusts can be complicated, but at their core, they’re very simple. A trust is merely a legal entity that holds title to a property. There are numerous beneficial reasons for a trust to own property, and a common reason is for estate planning purposes.

When this occurs, the trust is typically referred to as a Revocable Living Trust. The grantor of a Revocable Living Trust is the person wanting to devise an estate plan. This grantor, after working with counsel to design the trust according to his testamentary wishes, transfers all his property to the trust. The grantor is also usually the initial trustee, meaning he manages the trust property, and the grantor is also the beneficiary, meaning he reaps the full benefit of the assets held in trust.

For the trust to work as envisioned and drafted, however, it must be funded. This means the grantor must give the trust his property. It is because the trust owns this property, that the grantor’s estate does not need to pass through probate to effectuate a title change from the deceased property owner to the heirs. Instead, the successor trustees appointed in the trust handle this without the need for court supervision.

Perhaps one of the most important benefits of the Revocable Living Trust is disability planning. With disability planning, when the grantor becomes unable to manage his own affairs, a child or spouse can step in as co-trustee to assist the grantor. While a Statutory Durable Power of Attorney can accomplish the same thing, banks or other institutions are not obligated to honor the Power of Attorney. In contrast, if the checking account is titled in the name of a Revocable Living Trust, it would be incredibly rare for a bank to deny account access to the trustee.

Revocable Living Trusts also serve a great purpose in blended family situations or in second marriage situations. The trust becomes a powerful tool to ensure the children of the first marriage do in fact receive the inheritance their parents envisioned. Without advanced trust-based estate planning, it is tragically common for estate funds to migrate from a sick spouse to the healthy spouse or from the surviving spouse to a new spouse. A well designed revocable living trust can prevent this misappropriation of family wealth.

Additionally, restrictions can be placed on an heir’s inheritance. For instance, an inheritance may remain in trust after the grantor dies and stay there until the beneficiary completes an undergraduate degree program or even until he successfully completes a drug abuse counseling program. The trust could even provide for monthly payments for life so long as the beneficiary keeps clean drug tests, or it could appoint a financial institution to assist as a co-trustee if the beneficiary has trouble managing money. If a potential heir has special needs, the trust could shield and protect this heir’s inheritance while preserving qualification for any federal or state benefits programs the heir may receive. Even if there are no restrictions, keeping the funds in trust for the heirs could prevent certain third-party creditors from gaining access to the property. It can also protect the inheritance from being included in the division of community property if the heir divorces. Trust-based estate planning is limited only by the imagination of the client and attorney working collaboratively to meet the client’s goals.