A significant number of estate-planning techniques are implemented in the form of a trust. There are trusts designed to accomplish a host of planning alternatives. In my experience, however, very few clients I initially meet understand what trusts do, what they involve, and how they are structured. Trusts and how they are used are apparently seldom taught outside of the professional domain.
A trust is created by a trust maker. Attorneys call the maker a settlor, creator or donor. Trusts can be created for the benefit of the maker and/ or for the benefit of other people. The people for whose benefit a trust is created are called beneficiaries.
Trusts can accomplish just about any objective of the maker as long as it is not illegal or against public policy.
- Trusts can continue in perpetuity.
- The beneficiaries can be discretionary or have vested rights depending on the instructions given to the trustee by the trust maker.
- Trust deeds are signed by the maker and the trustees.
- Trust beneficiaries do not have to sign the trust document or will containing a trust.
- Any number of separate trusts can be created in a single trust document.
- When the maker puts property in a trust, the maker ‘funds’ the trust.
- Trust makers can be beneficiaries of their own trusts.
There are several different trusts that accomplish a host of estate-planning objectives. All trusts can be categorized in one of two ways. A trust is either a living trust or a death trust. Living trusts are often referred to as inter vivos (Latin for living) trusts. Death trusts are called testamentary (from the Latin testamentum) trusts and are created in a person’s will. They do not come into existence until the death of the will maker.
A living trust is always created during the lifetime of the trust maker and usually provides that the maker is to be a beneficiary. Living trusts can also pass the trust property to the maker’s beneficiaries on the maker’s death. Because living trusts can pass property on the death of the maker, they are referred to as will substitutes.
A death, or testamentary trust can only be created in a valid will. These trusts are never created to benefit the maker. Death trusts are created by a will maker, and although they are created or drafted during the will maker’s life, they are not operative until the maker’s death. Death trusts have no life until the death of the maker.
Since a will goes through the winding up of an estate process, the trust – created in that will – will also go through the process.
Both living trusts and death trusts represent massive tools to estate planning professionals. They allow professionals to accomplish their clients’ estate planning objectives. Estate planning involves more than the outright passing of property from one person to another. People want to give what they have, to whom they want, in the way and when they want. They do wish to reduce taxes and costs to the greatest extent possible. These objectives can be accomplished through the utilization of various trust formats.
Death trusts can always be cancelled or changed by the maker, as long as the maker is competent, up until the maker’s death. Living trusts can provide a mechanism to be cancelled or amended regardless of whether the maker is competent or alive.
Estate planning trusts are designed to allow people to pass title to their property to others either during lifetime or at death.
I strongly believe that estate planning professionals should use the living trust as the main or foundation document to accomplish the majority of their client’s estate planning objectives. The living trust is a most attractive estate planning device. It can be used instead of a will to accomplish the bulk of your estate planning goals. Living trusts have been used successfully for centuries, but their use as a total will substitute is a comparatively recent development. In my opinion, they have truly ‘come of age’ and should be used by just about everybody.
Here’s a preview of the benefits that can be derived from the use of this very attractive estate planning vehicle:
- You can give what you own to whom you want and when you want subsequent to death through the use of a living trust. As the trust maker, you can spell out all your distribution terms and requirements as to how your property passes after your death.
- A living trust can control, co-ordinate, and distribute all your property interests while you are alive as well as on your death.
- By using a living trust, you can arrange for your well-being under your terms as you advance in years, become ill, or become mentally incompetent.
The use of a living trust assumes that your plans and affairs will remain private, rather than being made public, on your death or incapacity.
- Living trusts are easy to create and maintain during your lifetime.
- It is not difficult for you to change or amend your living trust at any time during your lifetime.
- Property that has been placed in a living trust during your lifetime is not subject to and does not pass through the estate winding-up process on your death.
- Continuity of cash flow and investments in your portfolio can continue uninterrupted by your death.
- Opportunities of death-tax planning available through will planning are equally available through the use of a living trust.
- By using a living trust, you can measure your post-death trustees’ abilities to manage your assets while you are alive.
- Living trusts are more difficult to attack, and usually less successfully attacked, by disgruntled beneficiaries than are wills.
On and after your death, all property in your trust and the income that property generates will be distributed by the trustees according to your precise written instructions. Anything that can be accomplished through the use of a trust created by a will (testamentary trust) can be accomplished through the use of the living trust.
Property in a living trust can be left to the beneficiaries outright on your death or it can remain in trust and be distributed over a certain period of time to your beneficiaries. Several trusts can be created within a living trust which will become operative for designated beneficiaries on your death.
In fact, there is no limit to the number of separate trusts that can be created in a single living trust. Each trust that is created within the trust document can spell out its individual terms with regard to the amounts to be distributed and the timing under which those amounts are to pass to your beneficiaries. Each of the trusts that are created in the trust document may have different terms and conditions as to the distribution of income and capital to your selected beneficiaries.
One receptacle to receive and distribute all property: through the use of a single living trust you can control the distribution of all your property. This is true not only for the property you put in your trust while alive, but also for other property which flows into your trust on your death. Proceeds from life insurance can be left to your trust if you name your trust as the beneficiary.
Your living trust can provide one receptacle to receive and distribute all your assets on your death. This should represent a major benefit to you. Property that is not placed in the trust during your lifetime can still be put in the trust after your death through the use of a short, well-drafted will. The provisions of the will simply state that any property you neglected to put in your trust will, nevertheless, pass to your trust after your death. The will should always be used in conjunction with a living trust. Its use assures that any forgotten property will ultimately be placed in the planning pot to be controlled pursuant to your master plan.
A living trust can be designed so that it can provide for your care during your lifetime. In your living trust, you can spell out in as much detail as you like how you wish to be taken care of with your own trust property in case of your incapacity, which could result from senility, accident, or illness. You can specify who your trustees will be if you become incompetent. You can also provide for the care of your loved ones should you lose control of your mental faculties.
The ability to provide for your care as well as the care of your loved ones during your lifetime is, in my opinion, one of the greatest attributes of a living trust. A living trust can avoid all the confusion and publicity occasioned by court proceedings that would otherwise come about upon your incapacity. This point takes on even greater significance in light of the ability of modern medicine to keep people alive under almost unbelievable circumstances.
Unlike a will, living trusts are private documents. They are not made public either while you are alive, at your death or subsequent to your death. By using the living trust, you can be assured that you will not be taking your affairs and your family’s affairs public. Living trusts, their provisions and the property they control, remain the exclusive business of the beneficiaries for whom they were created; other than the trustee, the trusts are nobody else’s business.
Easy to create and maintain
Revocable living trusts are easy to create. I believe you should be knowledgeable, but the assistance of estate planning professionals should be sought.
Estate winding-up process
Property that is in a living trust will not, on your death, go through the estate winding up process. This is a process that passes title to assets. Since the title to your property is already in your trust and since the trust does not die with you, there is no passing of title required; title has already passed during your life. The estate winding up process is not applicable to trust property.
Total avoidance of the estate winding-up process is an enormous benefit to you and your beneficiaries. It represents a significant savings in costs and time with respect to your affairs.
Continuity in the handling of your affairs
Because there is no estate winding up process associated with living trust property, you can be assured that a smooth and uneventful transition will occur with respect to your affairs on your death. Your beneficiaries automatically begin to receive income and capital on your death pursuant to the terms written in your trust document. This fluidity with regard to your affairs is of major importance because it reduces costs and does not create unnecessary change or crisis for your survivors.
Planning opportunities for death tax (estate duty): there are a host of techniques available that are used to reduce estate taxes by professional estate planners. In the main, these techniques have traditionally been implemented by planners through the use of trusts created by the client’s will (testamentary trusts). A significant percentage of the estate planning professionals have used, and continue to use, the will as the vehicle within which they plan to reduce estate taxes.
The techniques of estate tax savings that can be implemented in a will can also be implemented with a living trust.
Measuring trustees during life
Most trust makers elect to be trustees of their trusts during their lives. Many of my clients elect to be trustees and name their spouses or close family members or friends as co-trustees. The advantage of the co-trusteeship is that on the incapacity or death of the trust maker, the co-trustee can continue the operation of the trust.
You may elect, however, to name the persons or professional institutions who will be handling your trust after your death on a right-now, basis. If you decide to name your trustees on a right-now basis, you will be able to observe their performance and abilities as they manage the trust property for your benefit. By using a living trust, you are able to measure the performance of your after-death trustees while you are alive.
Difficult for disgruntled heirs to attack
There are many horror stories associated with unhappy heirs attacking the will of a maker who did not leave them what they thought they had coming. Wills are usually contested by family members who were “cut out” or who received less than their anticipated fair share of the maker’s property.
Living trusts are much more difficult for disgruntled heirs to attack than are their will counterparts. Living trusts are private documents that are not involved in the estate winding up process. They are not placed in a public forum that encourages debate, as are their will counterparts. They are not subject to all the legal formalities that are associated with wills. Because there are fewer legal rules with regard to their creation, there are fewer legal opportunities to invalidate them.
DR MERVIN MESSIAS
JD (Juris Doctor) / BA, LLB (Wits) / TEP (Trust & Estate Practitioner) / MTP (Master Tax Practitioner – S.A)