Today, I want to talk about trust. I want to define what a trust is, explain the roles that are involved with the trust, talk about the uses of trust, as well as explain in detail, two of the most common trusts.
But first a disclaimer, I’m not an attorney and I cannot practice law. Nothing I say today is considered legal advice. You should consult with your attorney before making any decisions. My goal here simply is to help educate you.
So, what exactly is a trust? Investopedia defines a trust as a legal entity with separate and distinct rights, similar, to a person or a corporation, think of it as an entity, kind of like a business, a shell, a structure that essentially has no ending. One of the reasons why people use trust is because people essentially die, but a trust, like a business could live potentially forever, trust can be established to provide legal protection.
For assets to ensure that they’re distributed according to their wishes. Additionally, trust can save time, reduce paperwork, and sometimes reduce inheritance or estate taxes.
When it comes to the roles of the people that are involved in trust. There are potentially four different roles associated with a trust. There’s the grantor, the trustee, the beneficiary, and the remaindermen. Now, not every trust has every one of these roles. It depends on what the trust is for, how it’s set up and what the trust document.
But to help explain this in greater detail, I think a visual would be helpful.
So, for those listening on the podcast, I’m going to be drawing on my iPad here. I’ll try to explain things as I’m drawing it. So, the first thing to understand, and I’m drawing a kind of a document is that there is a document that manages the trust that’s called a, the trust document, essentially that outlines the purpose, the intent, the people, the roles, the rules the purposes.
, the constraints that outlines the trust. So, drawing a rectangle, the trust essentially is an entity, so think of it as just kind of a box that can hold various things. So, there are potentially four different roles. The first role is the grantor. So, I’m drawing an arrow to the left of it.
And writing the word grantor. The grantor is the person that creates the trust, establishes the trust document of the purposes, constraints, rules. And they’re the ones that fund the trust. So, they put inside of the trust money, or property, or assets, or various things. I’m drawing a little house with money, symbols, things like that.
And the idea is that The property and the money and the bank accounts are put inside of the trust. They are retitled to the trust. So, the person, the grantor no longer owns these assets. Technically this trust owns the asset. The trust is then managed by a trustee. So, I’m writing the word trustee above the box with an arrow to it.
They are the ones that have the legal fiduciary responsibility to manage the trust and the assets inside of it. Now, the reality is the trustee, and the grantor could be the same person. Like I’ll show you when we get to the revocable living, but they don’t have to be, they could be different people.
Additionally, there could be co trustees, there could be successor trustees. So, if something happens to the primary trustee the other co-trustee could take. Over the responsibility or a backup, a successor. Additionally, and I’m drawing an arrow out of the, underneath the rectangle box, there is beneficiaries.
So, beneficiaries, those are the ones who receive income. or proceeds or capital from the trust, again, based upon what the trust document says. It could be monthly amount of money, it could be yearly, it could be based on conditions. Again, it all depends on how the trust is set up. At some point, again, based upon the trust documents, the trust will terminate.
And when it does, what is left inside of the trust goes to the remainderman. The remainder man is essentially who gets the proceeds of the trust when the trust is finished. The proceeds are also called the corpus or the remainder, what’s left inside of it. So not all trust will have all four roles.
Again, it all depends on the purpose, the intent, the structure of what the trust is for.
The reality is there are a lot of different trusts and based upon their intent or their purpose and the rules and the laws associated with it, it can do and function a lot of different ways. I found a blog post that has a list of 30 plus common different names that I linked below in the show notes if you want to check it out.
One of the most common trusts is that of a testamentary trust. Oftentimes a testamentary trust is created by a will, and it outlines what happens to assets upon the death of the grantor.
So, I’m going to illustrate how I set up hours when our children were minors. This is not a recommendation. It’s just simply an example of how we did it when our kids were young to help maybe create some ideas of ways that you can explore setting up you.
Trust for your children. Should you have them?
So, the first thing to understand about again how we set it up again, not a recommendation just helping you understand the concepts here Was that Eric and I’s wills were set up where if something happened to either one of us the other person would receive all the assets the property and life insurance money.
And then when something happened to that second person, essentially all our assets were to be sold and go into a trust for the future benefit of our children. So, if something happened to me and I died, everything went to Erica. And then when, if something happened to her, it would go into trust. If something happened to Erica, if anything would come to me, when something happened to me.
Everything would go into trust. The idea was that all monies would end up flowing into this trust, a testamentary trust. It would be created upon the death of the second person. And then it was managed properly according to our wills and our trust documents.
So again, I think a visual would help. Explain this a little bit better.
So again, to help illustrate this more, I’m going to show you how we set up ours when our children were minors. All our children now are adults and independent. But the, when they were all small, this is how we set it up. Again, not a recommendation, just helping you get the concept and it’s an illustration purpose only.
So, Eric and I, again, we had, essentially mirroring wills. And so, the wills Basically, we’re the same things. They said the same things. And so again, something happened to her. Everything came to me. Something happened to me. Everything went to her upon the second death of either one of us. That’s when all this would kick in.
What we did was we left a certain amount of money upon. The death of the second person to the caretaker of the children. So, the caretaker or the guardians, those are the people who got our kids. We wanted to differentiate who took care of money and who took care of the kids separately. That way everybody had different roles and they were best suited for that.
So, we chose people that loved our kids, that had a relationship with our kids, that would raise our kids according to the same, morals, ethics, values that we had. But the reality for us was that this couple was inheriting., four kids. And so that’s a major lifestyle change. So, we want to give them a pot of money, a couple hundred thousand dollars upon the death of the second one of us, because they needed a bigger house.
They needed more bedrooms. They needed bigger cars; they needed third row SUVs or minivans. So again, and that was going to cost money. And I didn’t think it was their financial responsibility to provide for our children. So, they would get essentially a pot of money. Right from the get-go.
Additionally, our children would receive survivor social security benefits, and so those would be set up to go to the caretakers for the monthly, expenses, electricity, the food, the clothing, etc. The rest of the proceeds from our wills would go into. A testamentary trust. And so, the money essentially would all flow into there.
Everything was to be sold. So, our houses, our cars, clean our bank accounts, life insurance or retirement accounts. Essentially everything would go into that. So that’s in this case. The second person to die, Eric and I would be the grantor and the will would establish a trust. So again, this was called a testamentary trust.
It wouldn’t be created upon until the death of the second person and our wills would kind of trigger that creation. So just for illustrative purposes, let’s say our trust received 1 million. We had four kids. So essentially each kid would have a Hot associated to them of 250, 000. Now we set up co trustees.
We essentially had two, we had a financial advisor that was one and a family friend. And the idea was that these two trustees would work together. And again, they were chosen for various reasons. The financial advisor obviously knew about money, knew how to invest, and stuff like that. So, it was a friend, guy I used to work with who would handle the financial, the investing side of things.
Our family friend who was also good with money, essentially debt free, wealth building, responsible Christian man who, again, knew us, knew our kids. He kind of had the lens of, is this good for the kids. And so there was some checks and balances between these two.
The trust allowed for provisions of money to be given to our children based upon, different conditions. So, a lot of times we refer to this as HEMS, health, education, medical. or support. So, if our children had some major medical things and they needed money from the trust, the trustees could decide, yes, this is appropriate expense to take care of their college money.
They would be given money, things like that. So, these two would distribute money. to the beneficiaries, which are our kids, our four kids as needed as at their discretion based upon, again, what’s kind of reading in the, there’s a trust document, essentially, it’s managing the intent of this.
Now, the way we had it structured was that each kid had a portion of money that was allocated to them, and it was to be given to them upon certain ages. So, the first distribution, essentially, they would get a third of their pot at age 25. So, whatever, this would be invested and be growing. And so, they would get one third of their money at age 25.
The idea was there. They’ve completed college that they’d be transitioning out on their own. So, they needed money for that, buy a car, move, buy furniture, et cetera. We gave them another distribution of their pot, their share, another third at age 30 because the idea is that this money would essentially be spent that they received at 25 and we give them another pot.
This might help them buy a house or upgrade a house. It might be married and having children by then. And we gave them essentially another third at age 35. And so, if they got a hundred thousand dollars here and they managed to blow it, we gave them another 100, 000 and maybe they managed to blow it.
The idea is that they had three strikes and if they blow all three, we can only help them for so long. And so, this was a way of kind of helping them receive money. Because think about it, if they would have gotten all that money, 25, they probably wouldn’t have the emotional maturity to be able to handle it.
So, I wanted to kind of give it to them in chunks. So that is in general, how we set up our trust. when our kids were little to provide for them. And the idea was that there’s lots of checks and balances in the systems. And we had different people in different roles for different things. Again, not a recommendation that you need to impose, just simply helping explain the concepts and illustrating it.
the other pretty common type of trust that a lot of people use is that of revocable living trusts. This might be beneficial for instance, if you have substantial assets, if you have a complex family situation with blended families, or a lot of people use this. Single people or couples as they get older to make sure that the handling of their estate is a little bit easier because as we explained in order of transfers and previously assets property that is not given to someone by contract or by title.
Ends up having to go through probate that can be expensive. It could be time consuming. And so, the idea of having things in a trust is that the trust doesn’t have to dissolve. The trust can hold the property and hold the assets until it’s distributed to the heirs for really in perpetuity can stay there for a long time.
And so, there’s not as much pressure to resolve things. So, a lot of times a person who is single might put stuff in trust. To make it easier on the executor. So, there’s not as much pressure and time to dissolve the estate. Again, this is not a recommendation. This is just simply help to explain the concepts.
And again, visual might be helpful.
And the last trust that we’ll explain through is that of a revocable living trust. So again, this trust will have a document that outlines the rules and the purposes and the constraints of the trust. Now unlike a testimony trust, this is made by a person who’s alive. It’s a living trust. So, it’s, it is, takes effect while the person is alive.
And the person who creates the trust is the grantor. The grantor would establish the trust and they would also fund the trust, so they would put their money. inside of the trust. They would put their assets like their house inside of the trust. They would put their cars essentially inside of the trust and to fund it, they would have to retitle the assets.
So, the bank accounts were no longer owned by the person. They were owned by the entity, the trust, the house that they lived in their primary residence would no longer be owned by the person. Sally Jane, it would be now managed by the living trust of Sally Jane. And the title would be in that entity’s name, the trust name.
Now that person, the same person who, who. Funded, it would also be the trustee, they would manage it, so the same person would manage it. Now they might have a successor trustee set up for when they died, a successor trustee. So when, when this person died, that person would now inherit the fiduciary responsibility to take care of things.
While they were living, the same grantor and same trustee would also be the beneficiary. They could take money out of the trust for whatever purposes they deemed necessary. It was their money. And so, the beneficiary, so again, the grantor, the trustee, and the beneficiary would all potentially be the same.
And this trust would be there until that person essentially either revoked it and terminated it where it would just close or essentially the person died. It’s a living trust at that point. Then basically, again, whatever’s written in the trust document, the successor trustee would distribute the remainder of the assets inside of there to the remainder men as appropriate.
And those would be different people, entities. Businesses, charities, again, whatever was written inside of there. So, this would be used for things where, again, there’s complex family dynamics, a lot of, wealth potentially it’s to make it easier because, as we explained before, when a person has a will.
Those wills and the property that’s managed by the will would have to go to probate. Well, the reality here is if everything’s in trust, the person who had the will, they don’t own anything. And so, there’s no need to go to probate. So that relieves the executor from having to manage a lot of stuff because There’s very little to be managed by the wills, just personal possessions, essentially, because the assets are managed by the trustee inside of the trust, and there’s not as much pressure and time elements to disclose, the, the assets they could be, they could be distributed whenever.
Okay. So that’s, again, another illustration, not a recommendation, just helping you understand how trusts work.
So, your micro action for the week is if you have a trust or if you have a will that creates a trust, let’s ensure that it’s structured the way you intended ensure that you have the right roles. The right people and that those people are still accurate given the changes that might’ve occurred in your life.
So today we talked about trust. We talked about the definition of a trust. We talked about the people that involved in a trust. We talked about the different types of trust there are and explained a little bit in detail of the two most common types of trust, hope this information helps you on your financial journey.
And until next time, I hope you have a great day.
