In every movie or TV show where there are very wealthy characters, there is usually one or more who are “trust fund babies”, yet this is a popularized Hollywood definition. While this can be the case sometimes, it is not the main use of trusts. An article from The Balance, “Trust Fund Definition in Estate Planning”, helps break down the more common use of trust funds.
Trusts are a great estate planning tool, and “trust fund” in estate planning terms can mean “living trust”. This means the trust will function even after the grantor’s death. The grantor is the person is the one who forms the trust. Trusts are generally established in two ways: revocable and irrevocable. Irrevocable trusts are when the grantor establishes a trust and immediately the management is passed to the trustee. Irrevocable trusts that continue to operate after the death of the grantor are what are typically referred to as trust funds. The assets in this trust provide long-term financial support to the beneficiaries. With a revocable trust, the grantor is the trustee and manages the trust themselves during their lifetime. Most revocable trusts are settled once the grantor dies, and the property held by the trust is transferred to the beneficiaries, effectively dissolving it. When an outright distribution occurs however, the beneficiaries lose any protections the trust provides. Our firm will typically plan for the property to sit in a “Beneficiary Controlled Asset Protection Trust” (a “BCAPT”) to provide the beneficiary the option of protecting the assets from divorces, bankruptcies and lawsuits.
In the case of revocable trusts, the grantor will name a successor trustee who will take over once the original grantor passes. This is usually done in the case of the grantor having minor children who cannot legally own property. The successor manages the trust’s income and property to benefit the children until they are of age to take it over, these children are your typical “trust fund babies”. Yet, the case is not always that the assets in the trust are sufficient enough for the children to live lives of luxury.
Once a living trust is formed, irrevocable or revocable, the assets that the grantor owns must be “aligned” with the trust and estate plan, generally referred to as funded. This means property/assets need to be moved into the trust’s ownership. The trust’s fund is the property it owns. The property can also be referred to as the corpus. Whatever funds the trust will generate income. This can be in the form of interest, dividends, or in the form of rent. The income that the trust earns is either payable immediately to the beneficiaries or the trust will reinvest the funds.
In order for the estate plan to work however, the attorneys should verify that the institutions have “aligned” the assets consistent with the instructions provided (i.e. ownership changed to the trust or beneficiary designations naming the trust or spouse depending on the asset and goal of the client). Most importantly, the attorney should “track” the assets throughout the clients’ lives to ensure that the assets are “aligned” with the estate plan at the time the client dies.
Tracking assets is a major part of our ongoing care program we offer to our clients. Without the ongoing care, the estate planning will typically fail and the client’s family will not be taken care of.
To learn more about effectively using trusts in your estate plan, visit our website today to schedule your consultation!
Reference: The Balance (October 6, 2017) “Trust Fund Definition in Estate Planning”