What Do I Really Need to Know About Trusts and Trustees?

A trust is an agreement between two parties, the settlor and a trustee. Trusts may be used for many purposes, and one is for the trustee to accept, manage and protect assets delivered by the settlor, administer those assets according to the trust’s instructions and distribute the trust income and principal, according to the trust only for the benefit of those named in the trust.

Kiplinger’s article “Trusts 101: Why Have a Trust?” explains that the trustee is a fiduciary and must act with reasonable care in administering the trust and selecting trust investments. She also must avoid any conflict of interest or self-dealing in holding, purchasing and selling trust assets, and diligently avoid breaching any of the trustee’s duties to the settlor and beneficiaries.

The trustee must follow the trust terms. She must also be wise in making investment and administrative decisions and be objective and transparent.

Trusts can be created for several reasons, such as the following:

• To oversee spending and investments to protect beneficiaries from poor decisions;
• To avoid court-supervised probate of trust assets;
• To allow for privacy;
• To shield trust assets from the beneficiaries’ creditors;
• To keep premarital assets from a division of assets between divorcing spouses;
• To earmark funds to support the settlor, when incapacitated;
• To manage unique assets that aren’t easily divisible, such as a vacation home or a pet;
• To manage closely held business assets for planned business succession;
• To hold life insurance policies, pay premiums and collect the tax-free proceeds to care for beneficiaries, fund closely held stock redemptions or purchases and provide liquidity to the estate;
• To provide structured income to a surviving spouse that shields trust assets for descendants, if the spouse remarries; and
• To decrease the amount of income taxes or to shelter assets from estate and transfer taxes.

A trust can be set up to achieve specific goals and give tools for the trustee to balance those goals with investment and economic factors.

The most common type of trust is a revocable trust or living trust. It’s usually not funded until your death. The trust will include your instructions for how you want your estate divided among your beneficiaries and how each person’s share or interest in the trust is managed, administered and distributed. Living trusts are flexible, so that as children grow into adulthood, you may make changes to reflect life events.

Talk with an estate planning attorney and create your estate plan with a will and a trust.

Reference: Kiplinger (June 11. 2019) “Trusts 101: Why Have a Trust?”