This guide defines the essential terms and the process of creating and distributing a trust, helping you plan confidently. It is advisable to work with an experienced estate planning attorney to tailor a trust that meets your specific needs and help guide trustees through the intricate financial duties of managing the trust.
How Is Trust Created?
A trust is a legal document that outlines how your assets will be managed during your lifetime and/or after your death. The person who creates the trust is the grantor, also known as a settlor or trustor. This individual has the legal authority to transfer ownership of their property or assets into the trust. The grantor supplies the initial assets within the trust.
Step 1: Decide What Assets to Place in the Trust
The first step in establishing a trust involves deciding which assets you want to include. Assets are property or valuable items, both concrete and digital, for which ownership will transfer from the grantor to the trust. They can range from cash, real estate, stocks, bonds and business interests.
Step 2: Identify Your Beneficiaries
Next, determine who will benefit from the trust, known as the beneficiaries. This could be family members, friends, or charitable organizations (or yourself in the case of a revocable trust).
Step 3: Determine the Rules of Your Trust
The grantor also sets the trust rules for how assets should be distributed or given to the beneficiaries. For example, funds could be designed for educational purposes, as a steady income, or as a lump sum upon reaching a certain age.
Step 4: Select Your Trustee or Trust Manager
The trustee’s job involves managing the trust’s assets to a high level of responsibility and dedication, called fiduciary duties. They ensure that all distributions to beneficiaries are made according to the trust rules, and fund management may last several years. The grantor can choose a trusted individual or a professional institution to serve as trustee.
Step 5: Drafting and Funding the Trust with an Estate Attorney
Create your trust by drafting a legal document with an estate planning attorney. Lastly, the grantor must fund the trust or transfer ownership of all assets, known as the principal, that the trust will manage. Assets must be placed in the trust for the trust to have legal authority over them.
How are Assets in a Trust Distributed to Beneficiaries?
Trust administration is the process of managing the assets, distributions and filings of a trust after the grantor’s death. These tasks can often be complex and time-sensitive, making the professional guidance of an estate lawyer essential. The trustee is responsible for managing the trust’s assets, ensuring that distributions are made in accordance with the trust document and fulfilling other fiduciary duties.
Step 1: Notification and Documentation
The trustee (or successor trustee in a revocable trust) will gather all necessary documents, including the trust agreement and in the case of a revocable trust, a death certificate. They must notify all beneficiaries and related parties about the trustor’s death or other qualifying event and the start of the trust administration process.
Step 2: Trust Asset Management
The trustee assesses and manages the trust’s assets. This may include liquidating assets, transferring titles and ensuring proper valuation. The trustee must also maintain detailed records of all transactions and decisions made.
Step 3: Financial Obligations
The trustee is responsible for settling the trust’s debts and obligations, including paying taxes. Before distributing assets to beneficiaries, they must ensure that all financial responsibilities are met.
Step 4: Distribution of Assets
Once all financial obligations have been met, the trustee distributes the assets, which involves making a payment or giving property from the trust to the beneficiaries based on the trust terms. Depending on the specific stipulations of the trust, this could be in the form of lump sums, structured payouts, or ongoing distributions.
Step 5: Ongoing Trust Management
If the trust is designed to continue over time, the trustee must manage it according to its terms. This includes ongoing investment management, tax filings and distributions to beneficiaries as required.
Trust Terms Definitions
- Beneficiary: Individuals or entities named by the grantor to inherit the assets in the trust.
- Fiduciary: Someone obligated to act in the best interest of another, such as a trustee for a beneficiary.
- Funding: The act of transferring assets into the trust is essential for its effectiveness.
- Grantor: The person who establishes a trust. They are also known as the settlor or trustor.
- Distributions: Making payments or giving property from the trust to the beneficiaries as outlined in the trust’s terms. Depending on the trust’s rules, this can include periodic payouts, lump-sum disbursements, or specific allocations of property.
- Principal: The original assets placed into the trust, excluding any earnings like interest or dividends.
- Trust: A legal document that outlines how your assets should be managed during your lifetime and/or after your death.
- Trustee: The organization or person tasked with managing the trust.
Understanding these terms and the steps to creating a trust can empower you to make informed decisions about your estate. Consult with an experienced estate planning professional to help you navigate these processes and establish a trust that aligns with your wishes and efficiently provides for your beneficiaries.
References: U.S. Bank “Trust Terms You Need to Know” and American Bar Association “Glossary of Estate Planning Terms: Estate Planning Information & FAQs”