Introduction
It’s a common misconception that trusts are only intended for the wealthy. While a trust isn’t the best solution for everyone, it can be an incredibly valuable estate planning tool to bypass probate, administer assets to minors, and provide further control over your estate’s assets when you pass away. In certain circumstances, trusts can also minimize someone’s exposure to estate taxes, and they can shelter assets from personal creditors, lawsuits, and liabilities.
Living Trusts vs. Testamentary Trusts
A trust that is established during your lifetime is called a living trust. If you provide instructions in your will to create a trust after you pass away, that’s called a testamentary trust.
Revocable Trusts vs. Irrevocable Trusts
As the name implies, a revocable trust can be amended or dissolved by the trustor (the individual who transferred assets to the trust) during their lifetime. In contrast, an irrevocable trust is set in stone, and generally cannot be altered by the trustor. In some cases, the beneficiary may be able to amend or dissolve the trust, but that depends entirely on the terms of the trust.
How to Set Up a Trust in Arizona
While a trust is a little more complicated and costly to draft than a last will and testament, it’s a fairly straightforward process. There are 5 steps to establish a trust:
- Select a trustee
- Name a beneficiary
- Set the terms of the trust
- Sign the trust
- Transfer property to the trust
Select a Trustee
The trustee is the administrator who will manage the assets held by the trust. With living revocable trusts, the trustor is usually the trustee, and the trust agreement nominates a successor trustee to take over when the trustor dies. At that point, the trustee will either dissolve the trust and distribute the assets to the trustor’s heirs, or they can continue to manage the principal and distribute income for as long as the trust agreement directs. For testamentary trusts and irrevocable trusts, the trustee will need to be a third party.
Note that while a trustee and an estate’s personal representative have a similar responsibility to manage an estate’s assets, a trustee has an additional fiduciary responsibility to prudently manage the trust’s assets. Trustees will be held to a higher standard and should manage the assets just as well as they would handle their own assets. As such, it’s normal for trustors to hire a professional trustee, such as a financial advisor or asset manager, or for the trustee to consult with investment professionals to ensure they are doing the best job possible.
Name a Beneficiary
The beneficiary is entitled to receive distributions of income and/or principal from the trust. The trustee will administer the funds to the beneficiary based on the instructions in the trust agreement. In many cases, the trust will dissolve and transfer all assets to the beneficiary when the trustor dies. However, it’s not uncommon to see legacy trusts that are intended to last far beyond the trustor’s death. In those cases, the trustee will continue to distribute income to the beneficiary as long as the assets in the trust last.
With a living trust, the trustor is usually listed as the primary beneficiary. Because the trustor is the trustee and beneficiary, it allows the trustor to retain complete control over the assets during their lifetime. The trustor would be free to manage the assets as they please, and access as much of the principal value as they need. When the trustor dies, the trust agreement will stipulate who is to become the successor beneficiary and receive the remaining assets.
If you’re considering a trust where your spouse or significant-other is the beneficiary, it would be wise to add one or more contingent beneficiaries to the trust agreement. If you and your spouse pass away at the same time, the contingent beneficiaries would receive the trust assets. If you and your spouse pass away and the trust doesn’t have a contingent beneficiary, the assets will need to pass through probate, which defeats one of the primary purposes of trusts.
Set the Terms of the Trust
The terms of the trust that are codified in the trust agreement can be as broad or as specific as necessary. With living trusts, it’s often wise to keep the terms of the trust broad so that the trustor can freely control and access the assets. With irrevocable or testamentary trusts, you may wish to include stipulations as to how and when the beneficiary can access the assets.
Trusts offer a remarkable level of control that can tailor the use of assets to almost any circumstance imaginable. For example, a parent who wants to establish a trust for their minor children could indicate in the trust agreement that the trustee is to distribute $10,000 per year per child to the children’s guardian until they turn 18, at which point the trust will liquidate and gift all remaining assets to the children. Similarly, a grandparent could establish a trust for their grandchildren that can only be used to pay for college education, weddings, or the purchase of their first home.
Sign the Trust
The trust comes to life when the trustor signs the trust agreement. Note that while other estate planning documents such as a will or power of attorney can easily be amended, trusts are more difficult to amend. In many cases, circumstances that warrant changes to the trust agreement may require dissolving the trust and drafting a new one altogether. As such, it’s important to do contingency planning with your estate planning attorney and your financial advisor to make sure the document you sign into effect meets your needs and offers enough flexibility.
Transfer Property to the Trust
The final step in the trust creation process can sometimes be the most challenging. It’s not enough to just establish the trust—you’ll need to formally transfer title of ownership of your assets to the newly created trust in order for it to work.
This can be relatively simple for bank and brokerage accounts, but the process can be confusing when it comes to physical assets such as homes, land, vehicles, jewelry, art, collectibles, and guns. If you’re drafting your trust with the aid of an attorney (which you should, by the way), ask if your attorney’s firm has a designated associate or assistant to help you with the process. At the very least, your attorney should provide you with detailed written instructions on how to transfer your assets.
Call our Arizona Estate Planning team at (480)467-4325 to discuss your case today.
