05 Jun Trusts. What Are They Anyway?
Trusts. It’s a word that gets thrown around a lot when it comes to estate planning. You might have heard things like, “everyone needs a trust” or “have a trust to avoid probate”. Neither of those things are very accurate. And I’ll cover why. But, before I do that, we need to talk about what they are.
Trusts are a relationship in ownership. When you own something, you both control the thing you own and you enjoy the benefits of it.
You’re wearing a single hat. That’s how most of us own most of our stuff. We decide what to do with it and enjoy any benefits of it.
In contrast, a trust separates control and benefit. The person who controls the asset is the trustee and the person who receives the benefit is the beneficiary. Now there are two hats.
The rules on how a trustee can control and how the beneficiaries well, benefit are laid out through the trust document. Although a trust isn’t an independent “thing”, like a business, the relationship and the rules created by the trust document can act like a basket.
Whatever is given to the trustee, when they’re wearing their “control” hat, is governed by the terms of the trust. Since the trust can survive the person who created it, the trust can say what happens to the assets in the basket after the death. The benefits of the assets and the control of the assets are resolved. Automatically. Assets held in trust are a Thing 1 asset. They don’t hit your estate, so they can continue to be controlled and the benefits given out, even after you die.
Trusts can avoid probate, but that ONLY APPLIES TO THE THINGS HELD IN THAT BASKET.
Have a house in your name? Not in the basket.
A car in your name? Not in the basket.
And on and on.
It can be a tool to avoid probate if the likely costs of probate are higher than the set up and administration of the trust. But the ASSETS HAVE TO BE IN THE BASKET, meaning they’re held by the trustee in accordance with the trust rules… or at least that they set up to transfer automatically.
There can be other reasons for a trust. A trust can govern how multiple people own an asset together. It can put an adult in charge of money to benefit children. It can provide tax savings.
Watch for future posts, where I’ll get into different types of trusts. This week, look for a new podcast episode. I’ll finish the two-parter with the second reason why we avoid organizing our legal affairs… we have to deal with a lawyer. In the meantime, listen to the first part, where I talk about our collective hang up with death.
Check out the podcast on the sidebar, Spreaker or Itunes. Subscribe and if you like what you hear, rate it. Like, share and pin if you’ve learned something new.
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