Trusts 101: Estate Planning With Trusts

estate planning trusts Apr 12, 2017

In today's video, I'm going to go over a little bit about trusts with you. I call this Trusts 101. The reason I'm doing this is because I know there's a lot of confusion about the types of trusts that are out there. I'm not going to get into real specifics about trusts, but I'm just going to give you this overview. So let's get started.

~Attorney Nicole Wipp

In this video we'll cover:

  • What a trust is
  • The two main types of trusts
  • The two categories of living trusts and the different goals that each can accomplish
  • What is meant by 'Funding' your trust

This is just a really quick Trusts 101. It's important to understand these concepts so that you make good legal decisions in the future.

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Prefer to read this information? Below is the video transcript.

Hi everybody, attorney Nicole Wipp here with the Family & Aging Law Center. Today I'm going to go over a little bit with you about trusts. I call this Trusts 101. It's just an overview about what are trusts and what are they going to do for you, and a little bit about the different types of trusts. The reason I'm doing this is because I know there's a lot of confusion about what trusts really are out there, because I've literally talked to hundreds if not thousands of people about trusts. I'm not going to get into real specifics about trusts, but I'm just going to give you this overview. So, let's get started.

The first question really is, what is a trust? Right? What is it even? The legalese of the answer is that it's a contract between the grantor, which is the person that creates the trusts, like usually if it's your trust, you are the grantor; the trustee, who is the person that manages the trust, it might be you, it could be somebody else, and the beneficiaries, who are the people that are going to benefit from the trust either during your life or after your death. That's the legalese.

What I'll tell you is that a trust is your rulebook, your rulebook, okay? This is important because if you don't make your rulebook, you're going to get the rulebook that the state gives you, okay? You're going to follow the state's rules. So, you can make your own rulebook, but you have to create it, and that's what a trust is for. All right, so there's two main types of trusts. When I say this, what I mean is, in the whole world of trusts, there are two very general categories of what trusts are.

The first one is what we would consider to be death trusts, also known as testamentary trusts. These are trusts that are created in a will. So, the will says, "Upon my death this trust is created." Okay? But the trust doesn't exist during your life, because it's in your will and your will is a death document. It doesn't come into being, the trust, until after your death. It doesn't transition control of assets in the event of a disability. So, if you're alive and you get sick, this type of trust, a testamentary trust, doesn't enable somebody to take control of your assets in a disability situation. And almost always it's going to require a probate court proceeding because it's created in a will, a will is inherently a document intended for probate, it's going to require a probate proceeding to create this trust. That's what's a death trust or a testamentary trust.

So, for this reason, a lot of people don't feel that these are very desirable, right? These don't sound like really great things for most of us. So that's why we usually when we're talking about trusts, are talking about things that are living trusts. What this means is that a living trust is a trust that exists during your life, okay? Unlike a testamentary trust that doesn't exist until after you're dead. It shifts control in the easiest way possible upon your death or disability, okay? So, unlike the testamentary trust, a living trust does allow the person that you say gets to be the trustee after you, to take control of your assets that are in the trust upon your disability or even death. And if you properly fund it, and I'm going to talk about this in a second, a living trust avoids probate, which is probably the biggest reason why people like trusts, okay?

Living trusts come in two categories: revocable and irrevocable. So, let's talk about that. Revocable and irrevocable living trusts are definitely two totally different legal strategies and they accomplish different goals. With revocable living trusts, which is the most common, by the way, when people call me or people talk to me and they say, "I already have a trust." 9.9 times out of 10 it's a revocable living trust, okay? We use these almost, I'd say, mostly for probate avoidance, right? The main reason people put together a revocable living trust is to avoid probate. Also, I look at a very good reason to have a revocable living trust is so that you can shift control in the easiest way possible when you get sick or if you get sick or upon your death. So that's what revocable living trusts basically two main reasons you'd put one together.

They are private if you keep them that way. So, we can keep privacy amongst our family or people that we trust. We don't have to go through a court proceeding, which is one of the big things that makes it private. And if you have a properly structured revocable living trust, it can provide asset protection to your loved ones after your death. This is key, not during your life, after your death. It's important to understand, and this is one of the biggest misconceptions about revocable living trusts out there, revocable living trusts do not provide asset protection to you during your life. If it's your trust, a revocable living trust is not intended to provide asset protection. So, one of the biggest complaints I hear from people or people get upset a lot of times, is because they believe that their revocable living trust provides them asset protection. You just need to understand that that is almost entirely not true, and that's not the purpose of it, that's not what it's meant to do. So, don't go around thinking that that's what's happening, if in fact you have a revocable living trust.

But that's part of the reason why there are these irrevocable living trusts. Once again, we create them while we're alive but they're mostly used for just tax planning and then asset protection. Generally, irrevocable trusts are really used for very wealthy people, because they create a lot of restrictions that a lot of people just don't want to accept. But we can create irrevocable trusts that don't have those restrictions, but I would say generally that's not the way that they're drafted by a lawyer. So, they do give asset protection to you during your life, and your loved ones after death, if they're properly written. We can protect assets from the nursing home, from predators, lawsuits, all kinds of things, with irrevocable trusts or types of irrevocable trusts. So, it can provide asset protection to you during your life, unlike the revocable living trust.

But when we're talking about trusts it's really, really, really, really, really, important to understand that if you have a trust you want to use a trust instead of beneficiary designations, okay? This is so common. People will have a trust and they'll have beneficiary designations simultaneously. There generally is not a good reason for this. It really can cause a lot of problems for you and your family members in the future. Because, this is the thing, if you have assets, like your 401(k), your IOA, and there's beneficiaries on them, on your bank accounts, you have transfer on death or payable on death, these are all beneficiary designations. They are not going to pass according to your will or your trust, they're not, they're going to pass according to that beneficiary designation.

So, this is confusing to people sometimes because they think, "Well, my trust says that everything's going to happen the way my trust says." But that's not the way it works when you have beneficiary designations. So, it's very important to understand this. This is an improper way to fund a trust. We don't want to have a beneficiary designation to people. We'd want the trust to be the beneficiary most of the time. A lot of times what will happen is, people will go to the bank or they'll go to their financial planner and they'll say, "Well, you're all set. I did your beneficiary designations for you." I'd just challenge that because that a lot of times is bad advice. You're not necessarily all set because your beneficiary designations are not going to create the same type of plan that your estate plan, whether it's your will or your trust, would do. So, I would challenge that statement.

You know, when you're talking to people at your bank or you're talking to your financial planner, you have to understand, they're probably well-meaning, but they're not lawyers, and they're telling you only a very small piece of the story. The small piece of the story they're not telling you, because they're not lawyers and they don't deal with this stuff, is that they don't explain to you that your beneficiary designations aren't going to protect your assets if your children get divorced, your children or your beneficiary gets divorced, gets sued, if they are bad with money, have poor spending habits, if they're in bad money relationships, right? Like the wife that goes and spends all the money, or the husband that goes and spends all the money. It's not going to protect your money from those things. If they're having issues with addiction, or they're not able to manage their own affairs because they're sick, right? They need nursing home care or they're sick or they have a disability, or they have creditors, are going through bankruptcy. Any of those kinds of things. Beneficiary designations do not protect from any of these things.

That's why I'm saying, if somebody tells you that you're all set with your beneficiary designation, well, you're not all set with all of these things. And a lot of times, at least with my clients, they want to be all set with these things. So that's why you want to have both a properly written and funded trust, because it can protect your money. But you have to have the right kind of trust. That's also why finding your trust is critically important. So, what is funding the trust? Well, funding the trust is the process of moving your assets into your trust. This gets a little confusing for people sometimes. Imagine that you have a bowl and you've got fruit in your bowl, right? If you take an orange and it's outside of the bowl and you put it inside the bowl, is it still an orange? Of course it is, right? I'm not trying to trick you.

So, it's just like the way that the trust works. A trust is like the bowl, it's a vessel. The orange is your bank account. You put the bank account inside the bowl or inside your trust, it's still your bank account. Just like an orange is still an orange. But you need to get it in there. And that's the thing that most people are not doing, even people that have trusts, is they're not funding their trusts. So, it's really important to understand that if your assets are not held by your trust, the trust isn't worth the paper it's written on. You have an expensive legal document that is not actually doing anything for you. So, it's really important, in fact, it's critical to fund your trust.

Also, understand that when your trust is unfunded, a lot of times what this means is that you're going to end up in probate anyway. So, the reason that you set up the trust is not even going to happen. Your trust is going to be empty and it's not going to protect your assets from probate. So, unfunded trust is probate, that's a big thumbs down, we don't want that. This is just a really quick Trusts 101. I knew I just threw a lot of information at you. But if you have questions, call or come on in to my office, watch more of my videos, learn more. It's really important to understand these concepts so that you make good legal decisions in the future.

Next: An Inherited IRA Is NOT Protected From Creditors in Bankruptcy!


The information in this video is not intended to be, nor should it be, construed as legal advice. It is for informational purposes only. For advice, specific to your situation, consult with a qualified attorney.