Demystifying Trusts

Even Though the Average Person Has Heard the Term, Trusts Are Something that Remain Mysterious to Most People

DEMYSTIFYING TRUSTS

RAYMOND J GERMAN NORTH DAKOTA ESTATE PLANNING ATTORNEY

If there is one area of estate planning law that most people have little or no understanding of, it’s trusts. Even though the average person has heard the term, trusts are something that remain mysterious to most people.

If you’ve ever spoken to an estate planning attorney or professional about trusts, you probably got the impression that these people think trusts are pretty important. And even though trusts are important in estate planning, the average person first hearing about them can have some difficulty understanding exactly how they work and what they involve. To demystify these important estate planning tools, let’s take a little time to go over the essential points.

TRUSTS SIMPLIFIED It might be easiest to think of a trust as an imaginary friend. Like the imaginary friends some children create, trusts don’t really exist in the physical world.

However, unlike imaginary childhood friends, trusts do have a very real legal existence. When you create your trust/imaginary friend, the law allows that friend to own property. Further, when your imaginary friend owns property, the law also gives it certain rights and abilities that you do not get if you owned that same property as an individual.

TRUST CREATION Creating a trust means creating a legal relationship between you, some of your property, and other important key people or organizations.

Trust Agreement.The actual creation of a trust begins when you create a written document, known as a trust instrument or trust agreement. In this

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document you state the terms under which the trust must operate. These are the rules that will govern the trust after you’ve created it.

Trustee.When you create a trust, you alsoselect a person or organization to serve as trustee. The trustee is a manager. Once you create the trust and transfer some of your property into it, the trustee has the responsibility to manage that property in the same way the manager or chief executive of a company has to manage the company’s assets.

Beneficiary. If the trustee is the manager of the trust property, that doesn’t mean he or she gets to use the property. Instead, the trustee is there to manage the property for the beneficiary. The beneficiary can be almost anyone you choose, such as your family, a charity, or even yourself.

The beneficiary is not the legal owner of the property, but does get to enjoy all the benefits, such as using it or, if it’s money, spending it.

TRUST CATEGORIES Even though all trusts operate under the same basic principles, there is a significant difference in the types of benefits they convey. The law gives certain trusts some rights, while other trusts have different rights. It’s therefore very important to be able to distinguish between the different types of trust available to you.

Living or testamentary. You can differentiate between trusts by determining when they take effect. If you create a trust that takes effect while you are still alive, this is known as a living trust. On the other hand, if you create a trust that only takes effect after you die, this is known as a testamentary trust. They’re called testamentary trusts because you provide

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for their creation by including specific terms in your last will and testament. Because your will only becomes effective after you die, so too does the testamentary trust.

Revocable or irrevocable. You can also differentiate between trusts by determining if the terms are changeable. The person

FREE LIVING TRUSTS REPORT LIVING TRUSTS CALCULATING THE BENEFITS A Living Trust is a very versatile estate planning tool - one that can be customized to suit all your needs.

who creates the trust, called the trustor or the grantor, gets to choose whether he or she wants to create a revocable or irrevocable trust. A revocable trust is one that allows the trustor to change its terms or its rules as he or she chooses. A revocable trust, on the other hand, has rules that cannot be changed. All testamentary trusts are irrevocable, and all revocable trusts are living trusts. However, some living trusts can also be irrevocable.

SPECIFIC TYPES Now that we know a little more about how trusts work, and the different categories of trusts that are available, we can take a look at the specific types of trusts you can make. It’s important to note that even though a lot of people use the

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same types of trusts, there are so many trusts out there that it’s impossible to list them all here. Knowing that, here is a brief list of some the most commonly employed types of trusts.

Revocable living trusts. A revocable living trust is one of most popular forms of trusts available because it allows you to transfer your estate outside of probate. This means that the property you leave behind after you die won’t have to go through probate before your heirs receive it as an inheritance.

Irrevocable life insurance trust. One of the more popular forms of irrevocable trusts, a life insurance trust effectively removes the death benefit provided by your life insurance policy from your estate. This means that when it comes time for your estate to calculate whether or not it has to pay estate taxes, it doesn’t have to include the death benefit provided by your life insurance policy in that calculation.

Testamentary trust. A popular option for grandparents who want to leave young grandchildren an inheritance, testamentary trusts allow you to name a trustee to manage the inheritance of a child who is too young to become the legal owner. You can also impose certain conditions upon the inheritance, such as deciding to distribute it in portions when the child reaches 18, 21, 25, 30, etc..

EVALUATING YOUR CHOICES If you’re feeling a little overwhelmed by trusts and the choices available to you, that’s understandable. A lot of people take time to educate themselves about trusts and how they work before they can feel comfortable making choices about

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what type of trust to include in their estate plans. Always talk to your estate planning attorney for more information about trusts, and don’t be afraid to ask questions if you feel you need a little more explanation.

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About the Author Raymond J. German As an attorney in Minnesota and North Dakota, Raymond J. German provides a wide range of estate planning and title services to his clients, with a primary focus on helping them provide for the security of their loved ones, reduce estate taxes and avoid or at least minimize the costs and delays of probate, all with a well-crafted estate plan. Mr. German defines the mission statement for Raymond J. German, LTD. Law Firm as "Helping one family at a time pass on values, beliefs and finances, that can be shared for generations to come." Mr. German is well aware of the growing importance of estate planning and dedicates himself to informing the public of the need for careful attention to their specific situations. He is a frequent speaker on a variety of estate planning topics, regularly presenting educational seminars for the public as well as private groups.

Raymond J. German approaches each challenge with not just solid expertise, but also remarkable enthusiasm and vigor. By constantly seeking simpler, better, and more effective ways of doing things, he continues to make a real difference in the lives of families and on the way estate planning is practiced by attorneys around the country.

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