Bite-Sized Bits of Knowledge

What Happens When a Trust Owner Dies? (And Other Basic Trust Information)

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So what happens to living trusts after death? Before we dive into that, it’s important to have an understanding of trusts overall.

Introduction to Trusts

What are trusts? How do they work?

Trusts can provide enormous flexibility and control to the creator’s wishes with respect to the devise of trust property to the creator and his or her beneficiaries.

This includes who receives it, when they receive it, how they receive it, under what conditions they receive it, all of which can happen both during the creator’s life and after death. Trusts enable you to protect assets and ensure they remain in the family. You can also provide for irresponsible beneficiaries as well as those with substance abuse or special needs. Learn more by checking out the video below.

[Read Transcript]

HAIMO: Hi, this is Barry Haimo. Thank you for stopping by for another dose of Bite-sized Bits of Knowledge, where we give you meaningful information in a short amount of time. Today we’re talking about trusts. What are they and how do they fit into your estate planning? Because they should be a consideration in all people’s estate plans.

Not necessarily they’re right for everybody. We’ll talk about that in the next video when we talk about advantages and disadvantages, but they should at least be a consideration.

So what are they? Trusts are, at their core, a separate legal entity, just like a business, a corporation, an LLC. They’re an independent legal entity, just like a person. They can own property, they can transact property, they can pay taxes. And so they’re kind of like a separate entity. Think of it like that.

There are three parts to them. There’s trustees, beneficiaries, and assets. They have to have these three parts in nearly every kind of trust. Trustee, beneficiary – or beneficiaries, plural – and assets.

Think of a trust as a car. You are going to put your assets into this car, and the car is going to drive. Only you’re writing the map, you’re creating the map. You’re creating the blueprint for where it’s going to go and how it’s going to get there, how fast it’s going to go, when it’s going to stop, when it’s going to turn. In my example.

The car benefits the beneficiaries. It’s 100 percent intended to benefit your designated beneficiaries. The assets are being used to benefit those beneficiaries in the way that you want. And the trustees are driving the car. So if one can’t serve, you do Chinese fire drill and the next one gets in the car and continues on your mission, fulfilling your wishes and continuing to drive on the map.

So all of this kind of is memorialized in what’s called a trust agreement. And the trust agreement and a revocable trust can be changed. You can change any time you want. You can redirect, you can change the map. You can change the car. You can change the beneficiaries. You can do whatever you want in a revocable trust.

In an irrevocable trust, as the name suggests, you really are much more limited in what you can change. And there are a lot of different ways to do that that are more or less risky depending on your goals.

So again, it’s a car, trustee, beneficiaries, assets. It’s all memorialized in a trust agreement.

You give these trustees whatever discretion you want to give them. Typically, there’s a standard called HEMS, or health, education, maintenance and support. That is the prevailing standard of giving trustees discretion.

What that means is that they’re going to manage the trust, they’re going to invest the assets, they’re going to transact, they’re going to hire professionals. And hopefully it grows over time while kicking some out to the beneficiaries. And they’re going to make distributions to beneficiaries.

And if beneficiaries ask for money, for example, they’re going to evaluate that request. Is it for health, education, maintenance, and support? Health, education, maintenance, and support? The most common standard. It really derives from historically a tax perspective, which I’m not getting into, but it’s pretty much what you’re going to find in most trusts.

But that being said, you can change that. Trusts are completely flexible in most ways except for against public policy. You can change the discretion of the standard. You can make it best interest. You can make it complete discretion of the trustee. You can make it HEMS. You can make it combinations. You can make it for corporate trustees one way, for individual trustees one way, for family trustees one way. The sky’s the limit on what you can do with your trust. You just have to have the idea and the goals and we’ll walk you through the process of getting to something that makes sense for your family and your needs.

So you got this car you got driving along for the beneficiaries. This is long after you’re gone. You’re going to make sure the assets are managed well. They’re organized, they’re protected, you’re still providing for your beneficiaries. They can come in and start driving the car too at certain times as well.

Most attorneys, I think, in my opinion, don’t fully share the same philosophy with me about keeping money in the trust. In trusts in Florida, there’s a protection benefit to beneficiaries if it’s structured the right way. So I like to keep the assets in trust if it makes sense, if it’s appropriate versus giving the beneficiaries distributions and then terminating the trust.

Because now the money’s out. The assets are out. Their creditors can swoop in. Their spouses can swoop in. It’s just putting the assets and the money at risk, I think, unnecessarily. So I always have a discussion with my clients about keeping them in trust and helping the beneficiaries who are qualified and responsible to take over and transition in at certain ages.

So trusts are not for everybody. Like I said, there are advantages, there are disadvantages. We’re going to talk about that next, but they should at least be a consideration in everybody’s plan and so I try to make that a part of our conversation.

So thank you for stopping by. I hope you found this helpful. Stay tuned for more. Bye.

Who are the Relevant Parties to a Trust?

One of the first steps in the process of understanding trusts is knowing who is involved and what their roles and responsibilities are.

When you create a trust to protect, grow, and distribute your assets, it involves a number of parties. These parties each perform different necessary roles and have individual responsibilities. In order for a trust to work, all of the relevant parties have to do their job.

So, who are the relevant parties to a trust?

Grantor

Also known in some cases as the Trustor, Settlor, or Donor. This title refers to the person, couple, or entity that owns the assets to be put into the trust. Any asset can be placed into a trust: antique items, art, investments, real estate, savings accounts, vehicles, and so on.

The Grantor is legally required to name a specific person who is to benefit from the assets held in the trust.

Beneficiary

A beneficiary is the person, people, or organizations who benefit from the assets held in the trust. The trust is primarily for his/her/their benefit. It is managed by the trustee for that purpose and based on an elevated standard of care called “fiduciary duty”.

Trustee

These are the individuals designated as the responsible party for controlling the assets in the trust. And depending on the nature of the trust, they can have a lot of power over what is done with the assets.

Trustees have a fiduciary duty to manage the assets in the estate for the benefit of the beneficiaries. And they are at the risk of being personally liable for failing to do so.

For example, they could decide to loan artwork in the trust out to museums. Or they could rent out real estate. Their actions need to show that they are attempting to grow the assets and act in the best interest of the trust.

Successor Trustee

For some trusts, the Grantor will name him or herself as Trustee while they are still alive. In these situations, the Trustees who take over after they pass away are called alternate or Successor Trustees.

A Successor Trustee could also be named in the event that the initial Trustee is unable to fulfill their duties. In either situation, the role of the Successor Trustee is identical to the role of a regular Trustee.

Trust Protector

A Trust Protector’s job is to – you guessed it – protect the trust. Trust protectors were originally used for tax purposes. Today, however, they are used in a variety of different trusts by people of varying socio-economic status. As a result, they absolutely must be properly drafted to be able to navigate a changing and unpredictable environment relating to taxes, law, family dynamic, and market fluctuations.

Some powers a Trust Protector may have include:

The ability to remove a trustee and have them replaced with someone else (not themselves).
The power to amend the trust if there are changes in the law that would adversely affect it.
The power to resolve disputes (between trustees if there are multiple people or entities acting as trustees, or between trustees and one or more of the beneficiaries).
The ability to alter trust distributions if there are changes to a beneficiary’s life.
The power to add new beneficiaries to the trust (for example, if there are additional descendants).
The ability to veto investment decisions.
The ability to provide oversight to a beneficiary who is also the trustee.

It’s crucial to ensure that you have named your relevant parties to a trust and understand their roles in order to protect your assets.

Trust Administration: Distributions, Protections, and Understanding the Duties and Responsibilities of Trustees

How do trust distributions work? What kinds of protections do beneficiaries have? What about protections for the trust from beneficiaries? Below, we have detailed a number of options, specific to the administration of trusts in Florida.

Distributions of Trust Property

The assets of the trust are distributed to beneficiaries as directed by the creator of the trust. And the Trustee may make distributions of income and principal of the trust to the beneficiary or beneficiaries as frequently or infrequently as they desire. Other times, the trust will dictate exactly when the trust income and/or principal is to be distributed to the beneficiary or beneficiaries.

For example, specific events can trigger distributions and divisions of the trust estate, such as the death of the creator or a beneficiary reaching a certain age. But there will be clauses in any trust agreement that leave certain decisions subject to the discretion of the Trustee. Discretion is particularly common in situations where the beneficiary is a close family member, such as a spouse, child, or parent.

HEMS

As mentioned in the video above, the most common provisions are in the discretionary standard known as HEMS (or health, education, maintenance, and support), which is a term widely used in estate planning. It means that health-related expenses of a beneficiary can be paid for using trust assets, including both regular and usual expenses (health insurance, dental exams, etc.) and irregular and unusual expenses (emergency treatments, expenses not covered by insurance, etc.).

And the Trustee may distribute income or principal to a beneficiary for tuition, career training classes, and books, but also for costs of living (rent and food, for example), as part of the educational expenses. The most discretionary provisions are those for maintenance and support, which allow for distributions for everything from living expenses, property taxes, and vehicle needs, to the cost of regular social activities or vacations.

Beneficiary Protection

A purely discretionary trust will have the most protection, provided the beneficiary is not also the trustee. But even still there are ways around that. Asset protection is a delicate balance between protection and control.

A lesser form of discretion is the HEMS standard, which originates from a tax context. HEMS can arguably be used as a discretionary standard to protect a beneficiary from creditors of a beneficiary who would otherwise be able to force trust distributions for the benefit of the creditors.

The creator of a trust may also add additional protections by disallowing a former spouse of a beneficiary from receiving any benefits from the trust assets, and/or add a clause that empowers the Trustee to stop distributions of trust assets to a beneficiary, if a beneficiary:

Is abusing alcohol or narcotics
Has a gambling problem
Is incarcerated
Develops a disability
Is acting in a way that shows total disregard of morality
Any other behaviors or scenarios that a grantor may choose

What About Revocable Living Trusts?

Simply put, “revocable” means that the person who created it can continue to make changes to it while they are still alive. They can even cancel it altogether. This is in contrast to an irrevocable living trust, which is essentially set in stone the moment you create it.

Benefits to a Revocable Living Trust

There are a number of benefits to setting up a revocable living trust.

You can change your mind. As mentioned above, if you’re choosing between a revocable living trust and an irrevocable one, a big consideration should be the fact that the irrevocable trust generally cannot be changed. So, for example, if you set up an irrevocable trust for your wife and then later get divorced, those assets are lost to you unless the trust was carefully crafted to foresee that contingency.

You can skip probate. Probably the biggest reason people put their assets into trusts in general is the ability to bypass guardianship and probate. Probate is the legal process of settling your estate, and it can cost your loved ones thousands of dollars. Moreover, it can be lengthy and stressful, sometimes taking a year or more to complete. It’s also terribly aggravating.

You can keep your assets private. If your assets go through probate, they become public record. If that’s not a very appealing prospect, you can set up a trust. No one will be able to see what’s in the trust unless you want them to see it.

You can keep your decisions from being contested. Unfortunately, when someone dies, it is not uncommon for loved ones to feel like their assets are not being distributed in the way that they actually would have wanted. This can lead to them contesting a will – or trying to fight against – the process in an attempt to change it. While it is possible to contest a trust, it is much harder than contesting a will, especially if the trust is created during life. So if you are worried about someone causing trouble for your beneficiaries, a trust can be a big help.

So, What Exactly Happens to Revocable Living Trusts after Death?

1. The trust automatically becomes an irrevocable trust, preventing anyone from making any changes to the trust to protect the creator’s wishes.

2. The trustee will be notified, so he or she can begin the process of managing the trust.

3. The trustee will then engage in a number of “administrative” tasks, such as transferring the property, acquiring death certificates, notifying the Social Security Administration, taking inventory of assets, contacting beneficiaries, and paying any necessary debts.

4. If the trust is set up more like a traditional will, with the expressed goal of distributing all of the assets outright to the designated beneficiaries quickly, this process will most likely be completed within 3-6 months depending on the complexity of assets in the trust. If, however, the trust was designed to be ongoing (for example, if the assets are to be held for minor children until they reach the age of adulthood), there will need to be continuous management until the terms of the trust are met and the assets can be completely distributed.

As you can see, there’s a lot to cover with trusts – and this doesn’t even scratch the surface! The best thing to do if you are interested in learning more about trusts and whether one or more might be right for you is to get in touch with us.

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Bite-Sized Bits of Knowledge

[Read Transcript]

Introduction to Trusts

[Read Transcript]

Who are the Relevant Parties to a Trust?

Trust Administration: Distributions, Protections, and Understanding the Duties and Responsibilities of Trustees

What About Revocable Living Trusts?

Benefits to a Revocable Living Trust

So, What Exactly Happens to Revocable Living Trusts after Death?

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