What Is a Trust and How Does it Work?
Trusts are legal arrangements set up to ensure that an individual’s assets eventually get passed to certain beneficiaries. The person who creates a trust puts the assets they wish to pass on in the name of the trust, and they charge a third party with administering the assets for the creator of the trust and the beneficiaries.
Put simply, a trust works through three key individuals or entities, which include the following:
- The trustee. This is the person or organization who is responsible for administering the trust.
- The beneficiary or beneficiaries. This may include a single person, several individuals, or charitable organizations that eventually receive all or some of the assets placed in the trust.
- The grantor. This is the individual who creates the trust and places the assets in it.
The primary reason for creating a trust is for the transfer of assets from one individual to another. These trusts may hold various types of assets. Some examples include cars, homes, and investment accounts.
Individuals often choose to place their assets in a trust to avoid having their assets and their heirs go through probate when they pass away. Probate refers to the part of the court system that is responsible for deciding whether a will is valid and then distributing the assets according to the will or according to state laws if there is no will. This process can be a lengthy one, taking several months, and much of the information involved is public record.
What Are Revocable and Irrevocable Trusts?
Revocable trusts are also called living trusts. They get this name because the grantor can change the assets and beneficiaries as long as they are alive and mentally and physically able to do so. With these trusts, the individual can name themself as a trustee and name a successor trustee or co-trustee. This is beneficial if the individual is diagnosed with a debilitating medical condition, as it allows the individual to get their affairs in order before they are unable to do so and then pass the responsibility of managing the trust over to the successor.
An irrevocable trust differs in that the individual can’t change their mind. Once the assets are placed in the trust and the beneficiary is named, it is fixed permanently.
What Are the Advantages of Having a Trust?
Individuals may decide to create a trust for a multitude of reasons. Some of the advantages they typically find most appealing include the following:
- Potential savings on taxes. There are some types of trusts that can lower an individual’s estate taxes.
- Time. The probate process is often long and arduous, so having a trust set up can avoid the need for your assets to go through probate, and therefore get them to your heirs sooner.
- Privacy. Because the assets placed into trusts are not required to go through probate, they are not made a part of public record. This is important to some individuals if they are making distributions that they don’t want to be public or if they are disinheriting someone. Keeping the distribution hidden in this case can avoid unnecessary drama.
- Control. With a trust, you can specify the terms you intend. This means that you can be strategic when protecting assets after a divorce, for instance, or if you want to control when your children receive monetary assets. It may also give you a degree of control over the way individuals spend the money you leave to them.
What Are the Duties of Trust Administration?
When a person is tasked with trust administration, they are given two sets of duties. The first includes the duties imposed by the terms of the trust, and the second is a set of default responsibilities, called fiduciary duties under trust law. The fiduciary duties that a trustee must carry out include the following.
- Furnishing pertinent information to beneficiaries of the trust. A trustee must provide detailed information to beneficiaries at times, whether they request it or not. This information may include the existence of the trust, the individuals’ status as beneficiaries, and any significant developments or changes to the trust.
- Identifying and segregating trust property. The trustee must keep trust property completely separate from their own property.
- Keeping immaculate records and furnishing reports. The trustee must keep specific records and provide reports to the beneficiaries, as ordered by the courts and dictated by the trust instrument.
- Being impartial. A trustee is required to administer the trust impartially, showing no favoritism to a group of beneficiaries or any individuals over others, whether in investments, disbursements, or otherwise.
- Being loyal. The trustee must be committed to acting solely in the interests of the trust’s charitable purpose or its beneficiaries. A trustee is prohibited from ever engaging in self-dealing or getting involved with a conflict of interest. The trustee must always deal fairly with the trust’s beneficiaries and always communicate all material facts to them.
- Being prudent. When a trustee administers a trust, they must act as a prudent individual regarding the circumstances, terms, and purposes of the trust.
Typically, a trustee in Granite Bay has two sets of powers, including those that the trust agreement grants them and those granted by California. If a trustee acts outside of the powers they are granted or violates their duties, consequences will ensue. The Granite Bay trust administration attorneys at McCunn Law can help a trustee avoid these consequences by navigating their responsibilities and executing their duties. We can also represent the trustee in court if it becomes necessary.