If you own real estate or other valuable assets you may have heard that you should set up a living trust. The most common reason for having a living trust is that real property, cash, and other kinds of property can avoid going through an expensive and time consuming probate. It can also be a way of protecting vulnerable people, pets, spendthrifts, public benefit recipients, children, and accomplish other purposes. That all sounds great, but how does it actually work? The purpose of this blog is to explain in simple terms how a living trust works. If you don’t understand the basics, you cannot knowingly decide if a trust is best for your family.
First, it’s called a “living” trust because it’s made while its creator is still living. It can easily be understood through analogy. Think of the trust as a boat that can hold your property (in reality a trust would hold legal title to your property). By placing your family’s property in the trust it can avoid going through probate. Probate is a process that allows property to be transferred from a deceased person to their heir(s) through the power of a judge. When you set up a living trust, you are giving the power to someone you trust, to transfer the property according to your wishes outside probate. By sailing past probate the property can be distributed more quickly and usually with lesser cost.
The people involved in a trust have different rights or duties. In my educational presentations I sometimes use several different types of hats to demonstrate the different roles.
The first hat is the settlor’s hat. I show the audience a tin crown with sparkling glass jewels to symbolize the Settlor. The Settlor is the person who creates the trust and puts property in the trust. The Settlor has lifetime rights in the trust property and can use it however they want. If the settlor becomes incapacitated the assets of the trust must be used for the settlor’s health, maintenance, support, and lifestyle while the settlor is alive.
The second hat is the trustee’s captain hat. In my presentations I hold up a white military style captain’s hat. The captain’s hat symbolizes the power and responsibility of the boat’s captain. He must deliver the cargo on the boat safely to their destination. The trustee, by wearing the captain’s hat, is legally responsible for protecting the assets in the trust.
Usually the person who wears the settlor’s hat as the creator of the trust also wears the trustee’s captain hat. This is because the settlor is usually the original trustee of their living trust. In the case of spouses or domestic partners, the settlors are usually co-trustees and can act as co-captains of the boat with shared duties to safeguard the property.
The third hat is the beneficiary’s hat. I pull out a colorful vacation hat. This is the hat of the person for whom the property is supposed to benefit. Again, the same person who wears the settlor’s crown and trustee’s captain’s hat, can also wear the beneficiaries vacation hat. The settlor created the trust, and is in charge of the trust as the original trustee, and manages the property for themselves as the current beneficiary.
When the settlor-trustee-beneficiary becomes incapacitated or is no longer able or willing to act as trustee, its time to pass the captain’s hat to the first successor trustee. The successor trustee is now in charge of the trust and its property as a captain is in charge of the boat and its cargo. The successor trustee must use the trust property for the benefit of the settlor-beneficiary.
When the first settlor-co-trustee dies, the surviving settlor, usually the surviving spouse, becomes the sole trustee responsible for the property. Upon the death of the second surviving spouse, the captains hat is passed to the first successor trustee. This is often a family member. The new trustee now wears the captain’s hat and must administer the trust. At this point the trust becomes irrevocable and nobody can change the distribution pattern of the trust.
The trust names successor beneficiaries who will receive the trust property after the final expenses and debts of the estate are paid. Because the original beneficary is deceased, the beneficiary hat is passed to a new person, or group of people. I hold up the vacation hat and explain that the property remaining after payment of the final expenses is to be distributed to the beneficiaries in the manner described in the trust. This property is called the “remainder.”
Usually the successor trustee, who will be trusted to faithfully administer the trust after the settlor’s death, is a close family member or friend. As such they are often a beneficary of the estate also. In this way the successor trustee wears the captain’s hat and a beneficiary’s vacation hat. They must follow the terms of the trust agreement and cannot favor themselves over the other beneficiaries.
Not every family has a member who can serve as a suitable successor trustee. The trustee must be reliable and trustworthy, capable of going to the bank and handling important paperwork. These families should consider naming a professional trustee company as a successor trustee. These firms are regulated and while they charge for their services in administering the trust, they can often be the most reliable means of making sure the assets are properly distributed.
I give this public presentation twice a year during the Estate Planning Series in Reno, Nevada, where I use these hats to help the audience conceptualize the different roles of people involved in a living trust. In this way they easily grasp the concept that one person can wear more than one hat. By understanding these basics, you are in a better position to determine if a trust is right for your property and family.
Attorney Kevin Walsh invites you to attend the Estate Planning Series held each March and September in Reno, Nevada. The course is free to the public.
Attorney at Law
Estate Planning Attorney in Reno, Nevada