Clients frequently come to us looking to get a trust. My first question is usually, “why do you think you need a trust?” And the replies vary of course, but most often refer vaguely to having heard about a friend having a trust or their financial advisor mentioning something about trusts or they saw something on the internet about trusts, and ultimately people rarely know what a trust is, how they work, or why they might need one, other than that trusts are a potential substitute to having a will, can help you avoid probate and everyone knows avoiding probate is good.
A lot of that is true, so apparently not everything you read online is a lie. There’s a lot of value in understanding what trusts are, how they work, and why you might want one instead of a will, so I’ll try to explain this very complex subject as simply as I can.
A trust is a lot of things at once, and there are a variety of types of trusts, but fundamentally a trust represents an agreement between two or more parties about the safeguarding of property put into the trust and potential uses of that property for the benefit of someone or something. The person who’s initially funding the Trust is call the Grantor; the person who manages the Trust is called the Trustee; and the person(s) who benefits from the Trust are called Beneficiaries. Typically, when someone is talking about a trust, they’re referring to a revocable trust, which is the most common alternative to a traditional will. Understanding the benefits of a revocable trust first necessitates an understanding of how probate works by comparison.
When someone passes away with a will, that estate has to go through probate, an administrative procedure through a county’s Surrogate’s Court. In probate, the person named “executor” in the deceased's will files a petition, the death certificate, and the original will, along with some additional documents depending on the circumstances. Assuming everything is filed correctly, around four to six weeks later the executor is granted “letters testamentary” which is the document evidencing legal authority to act on behalf of the estate. With that, the executor then can open an estate bank account, find and transfer the deceased’s assets into that account, and begin to pay any outstanding debts of the deceased, which most typically include credit card bills, medical bills, and utilities. Seven months after the issuance of letters testamentary, the creditors’ window to make claims on the estate ends and the executor can then distribute the remaining assets in accordance with the terms of the will. Once the estate is fully distributed, they file a final accounting with the court, and the process is over.
A revocable trust operates much differently. A revocable trust operates as a sort of cross between a will and a company. When alive, the grantor can create a trust for the benefit of themselves and their family, name themselves trustee, and insert conditions into the document which dictate when and how trust property can be accessed, and by whom. Typically, the grantor can use the trust funds in exactly the same way they could use the money before it was put into the trust. There are also generally provisions to account for what happens if a beneficiary is disabled, specifically directing for a new trustee to be named if the trustee is unable to discharge their duties, and for money to be used for medical care of the disabled beneficiary. Then, there are additional provisions to dictate where the trust funds go upon the death of the grantor and/or initial beneficiaries. A trust can’t last indefinitely, but funds can be held in further trust after the death of the initial beneficiary for a subsequent beneficiary on whatever legal conditions the grantor designs. Upon their death, by the terms designed in the trust and without court intervention, the subsequent trustee takes over and distributes the trust assets in accordance with the terms of the trust. If it says to pay out the funds immediately, that’s essentially what they’ll do. If it says to hold the funds in further trust for the benefit of the deceased’s spouse or children, then the successor trustee continues in their role and follows the trust like an instruction manual, making whatever distributions are required when due. Ultimately, a trust creates a plan, with many contingencies, without court supervision, allowing for the safeguarding and use of family money.
There are many reasons why you may want or need a trust to accomplish certain estate planning goals. If you have any additional questions, please don't hesitate to ask.