March, 2003

Trust Me

Well, I said I was only going to do a three part series on estate planning, but enough of you have asked that I decided to extend it to four and talk about trusts.  After this I promise to get back to other issues.

Trusts are a very simple concept that only get complicated when the lawyers get involved.  They involve three roles:  A Donor who transfers property to a Trustee to hold and manage for the benefit of a Beneficiary.  You can create a trust to take effect during your lifetime (an intervivos or living trust) or you can create one through your will to take effect after you have died (a testamentary trust).  Trusts can also be revocable, meaning you as the Donor can change your mind and take the property back from the trust, or irrevocable, meaning once you transfer the property you lose all control over it.  What type of trust you want to create depends on what you are trying to accomplish and what you are willing to give up. 

If your concern is to avoid having your property tied up in probate court after you die, then a simple revocable living trust may be the way to go.  Under this trust, you retain complete control over your assets while you are alive, and yet the property would still avoid the costs and delays associated with probate court.  In fact, what your heirs save in administrative costs more than makes up for what it costs to create a trust.

If your concern lies in protecting your property from certain creditors, then you may have to surrender some control over it as you put it into a trust.  Instead of a revocable trust, it may have to be irrevocable.  Instead of naming yourself as the trustee or beneficiary, you may have to name someone else to fill these roles.  Without trying to oversimplify it, the general principal is that the more protection from third parties you desire, the more control you are going to have surrender.

Another purpose of a trust is to direct how your property is managed after you are gone.  For example, you may want your millions used to save the Spotted Owl.  Or you may just not want your good-for-nothing kids to waste their inheritance at the casinos.  Testamentary trusts are great for this as they allow you to control how, when and to who your money is distributed after you are gone. 

Overall, trusts are a great tool, and not limited to the rich anymore.