Sometimes, when your lawyer is discussing your estate planning goals, he or she will suggest that you should create a trust as one of your estate planning tools.

A trust is a separate legal entity apart from you that reflects your intent about the distribution of your property in the trust.

There are many different types of trusts. This document will discuss only the common types of trusts that we draft in this office.

PARTIES TO A TRUST

There are different roles in a trust, and these roles are played by various individuals called “parties” to a trust. An individual may serve in more than one role in the same trust. For instance, the settlor may be the initial trustee and may also be the primary beneficiary.

There are three essential parties to a trust – settlor, trustee, and beneficiary. There may also be another party, called a trust protector, but this party is not required and is not commonly found in simple trusts.

The Three Essential Parties are:

1. Settlor. The settlor is the party (or parties) who creates the trust. Settlors are also called “grantors,” “trustors” or “makers.” Wallis Law Firm documents use the term “settlor.”

2. Trustee. The trustee is the party who administers the trust and carries out the settlor’s intent. The trustee can be one individual, more than one individual (co-trustees), or an institution (like a bank or trust company). The trust can also name alternate or successor trustees:

• Co-trustees are two or more parties who act as trustees at the same time; and
• Successor trustees (sometimes also called alternate trustees) step in as the acting trustee when the previously acting trustee is no longer able or willing to serve as trustee. Depending on the language in the trust, successor trustees can act together as co-successor trustees, or successively (each succeeds the prior).

If there are co-trustees, or co-successor trustees, the language in the trust determines whether each can act alone or whether they must act together.

If your property is titled or held in the name of a trust, only the acting trustee of the trust can handle matters concerning that property.

3. Beneficiary. The beneficiary is the person or persons for whose benefit the trust was created. Sometimes there is only one beneficiary named, but more often there are multiple beneficiaries. Some beneficiaries are “primary beneficiaries,” which means they have some entitlement to the assets in the trust without any necessary pre-conditions that must come to pass. Trusts also usually name “contingent beneficiaries” (also called “secondary beneficiaries”), who are not entitled to the assets or benefits of the trust until some specified condition or event occurs (often the death of one or more primary beneficiaries).

Non-Essential Party to a Trust (Not Required) – Trust Protector
It is becoming increasingly common (but not required) for a trust to name a trust protector. Settlors sometimes appoint a trust protector to supervise the trust and ensure the purpose of the trust, as envisioned by the settlor, is carried out even after the settlor becomes incompetent or dies. Including a trust protector can be a way for the settlor to ensure his or her needs and goals are protected.

The powers granted to a trust protector vary depending on the language in the trust and state laws. Some trust protectors have the power to modify the terms of the trust, monitor the trustee, remove a trustee, and/or fill a trustee vacancy.

REVOCABLE TRUSTS AND IRREVOCABLE TRUSTS

Trusts can be divided into two major categories: revocable and irrevocable. Whether a settlor creates a revocable trust or an irrevocable trust depends on the settlor’s purpose for creating the trust.

• Revocable Trust: A revocable trust, which is the most common type of trust, may be modified, amended, or revoked (dissolved) by the settlor at any time. Sometimes in the trust, the settlor grants another individual the authority to modify, amend or revoke the trust. A revocable trust automatically becomes irrevocable at the death of the last surviving settlor. However, the name of the trust does not change at that time, even if the trust name contains the word “Irrevocable.”
• Irrevocable Trust: An irrevocable trust generally cannot be modified, amended, or revoked by anyone other than the courts. A settlor may create an irrevocable trust for tax purposes or other special purposes. One common special-purpose trust is a special needs trust.

OTHER TRUST TERMS YOU MAY ENCOUNTER

• Inter Vivos Trust. The term “inter vivos” is Latin and means “between the living.” An inter vivos trust is simply a trust created by the settlor during his or her lifetime. An inter vivos trust is more commonly called a “living trust.”
• Grantor Trust. A grantor trust is a living trust in which the settlor retains control over the trust property or its income to the extent that the settlor is taxed on the trust’s income. In a grantor trust, the settlor is typically the initial trustee and the beneficiary, and family members are often secondary beneficiaries. The term “grantor trust” is officially defined in the Internal Revenue Code (“IRC”).

Many revocable living trusts are grantor trusts. What this signifies is that the trust may use the Social Security Number (“SSN”) of one of the living settlors as its Tax Identification Number (“TIN”). Income earned by the trust would then be reported on the settlor’s personal tax return. Once the last surviving settlor of the trust dies and the trust is no longer revocable, the trustee will need to obtain from the Internal Revenue Service (“IRS”) a unique TIN for the trust (called an “Employer Identification Number” or “EIN”).

• Testamentary Trust. A testamentary trust is a trust that an individual creates in a will. The individual who creates the will is called the “testator,” and this same individual is also known as the “settlor” of the trust created in the will. Because the trust is created by will, it does not take effect until the testator/settlor dies. A testamentary trust is also called a “trust under will.”
• Special Needs Trust. A special needs trust is a trust established for persons with disabilities (the “trust beneficiary”) that helps provide goods and services for the trust beneficiary while maintaining the trust beneficiary’s eligibility for public benefits at the current needs-based level. Special needs trusts are typically governed by the laws of the state where the beneficiary resides and are drafted to comply with the rules of federal needs-based benefits programs for people with disabilities.

DO I NEED A TRUST? FACTORS INFLUENCING YOUR DECISION TO CREATE A TRUST

Whether creating a trust is necessary, or would be beneficial, depends on your estate planning goals. Many factors may influence your decision to create a trust. Some of these factors are discussed in more detail below.

Aging or Worsening Health of Settlor
A trust can be useful for ensuring management of your assets during your lifetime, especially as you are aging or if you fear increasing incapacity due to a long-term or chronic illness. While you can certainly appoint an agent in a power of attorney to handle your affairs if you are unable to do so, the agent operates only under a duty of loyalty to act in your best interests. A power of attorney does not provide the agent with specific instructions on how to manage your financial affairs. This can be accomplished more readily with a trust.

If you set up a trust to ensure management of your assets during your lifetime, you may serve as the initial trustee so that you maintain administrative control of your assets for as long as you are able. After establishing the trust, you would need to transfer your assets to the trust. You can do this by retitling all of your accounts from your personal name to the name of the trust. If you expect to be the beneficiary on someone else’s accounts or life insurance policies, you should request that they change the beneficiary name from your personal name to the name of your trust.

Minor Children
In North Carolina, a guardian must be appointed for minor children who lose both of their parents. However, a guardian does not have unfettered use of the parents’ assets that are left directly to the minor children in a will. Distribution and use of assets bequeathed directly to minor children must be supervised by the Clerk of Court until the child reaches the age of 18, at which point formal guardianship ends and the assets are turned over to the 18-year old child.

Rather than leaving assets directly to minor children in a will, another option is for parents to create a living trust with their children named as beneficiaries. Parents can then leave the property in their estate to the trust. Alternately, during their lifetimes, parents may title some, or all, of their property in the name of the trust, rather than in their own names, so these assets bypass their probate estate entirely.

In the trust, the parents can appoint a trusted person (or institution) as trustee, and this party can administer the trust assets in accordance with the parents’ wishes as stated in the trust. For instance, the trust can state that the assets in the trust should be used to pay for education if not otherwise needed for the children’s care and maintenance. The parents can also direct the trustee not to distribute the remaining funds held in trust until each child (or all the children) reaches a certain age and has more wisdom and maturity to manage the assets. One of the biggest advantages of leaving assets to a trust, rather than directly to minor children, is that court supervision is not required when assets are left to a trust.

Individuals with Disabilities
Parents, grandparents, siblings, and other relatives often create a special needs trust for a child or adult family member with a disability (the beneficiary). Sometimes these trusts are set up by the beneficiary’s guardian or the court.

If the trust is properly drafted and administered, the trust will allow the beneficiary to benefit from the trust while retaining eligibility for federal needs-based programs such as Supplemental Security Income (SSI), Medicaid, Section 8 housing, and food stamps. Any income to the disabled person, which may reduce or disqualify the person for federal benefits, is placed in the trust, and these assets are not included in their benefits eligibility calculations.

If you plan to make lifetime gifts or bequests at death to a person with disabilities, it is often preferable to make the gifts or bequests to the person’s special needs trust to prevent disqualifying the person from public benefits. However, keep in mind that only certain distributions from a special needs trust are permissible. Non-permissible distributions will reduce or eliminate eligibility for public benefits.

General Comments About Whether You May Want a Trust
Many other factors may influence your decision to create a trust. In general, however, the creation of a trust can provide:

• Management during your lifetime. If you are unable to manage your assets, or you foresee a time in the future when you will not be able to do so, a trust may be a useful tool to provide a legally binding roadmap for someone else to manage your assets during your lifetime.
• More efficient estate settlement. A trust may be a more effective way to distribute your assets after your death. For instance, while you can specify in your will who should receive your property at death, in a trust you can also instruct your trustee as to when the beneficiaries receive the assets and under what conditions.
• Easier estate settlement. Assets held in a trust, rather than in your own name, do not become part of your estate after your death and do not have to go through probate. This may make the assets available more quickly and easily to your beneficiaries after your death.
• Privacy. Unlike the provisions in your will, the terms of a trust are more private and do not become public record.

If your estate is simple, however, and you have no minor children or grandchildren, and your intangible assets, such as bank and securities accounts, are either jointly titled with right of survivorship or have designated beneficiaries, you may not need the extra complication of a trust.

FUNDING THE TRUST

Once you create a trust, you need to ensure it is funded during your lifetime or will be funded at your death. “Funding a trust” means putting your property into your trust.

Trust Is Funded at Your Death

• Testamentary Trust. If you have a testamentary trust in your will, your trust is created upon your death and is funded when your personal representative (either your executor or administrator) distributes estate assets to the trustee.
• Living Trust.
  • If you have created a living trust, your will would generally include a “pour over” provision in your will in which you bequeath the residue of your estate property to the trust. A simple pour-over provision might look something like this: “I leave the rest of my estate not otherwise distributed to the XYZ Trust.” Upon your death, the personal representative of your estate transfers the applicable assets from your probate estate to the trustee of the trust as part of settling your estate. Your trust lives on according to the terms of the trust, and your trustee or successor trustee takes over its administration.
  • As mentioned above under “Factors Influencing Your Decision to Create a Trust“, if you are the initial trustee of your trust, you can title (or retitle) your personal assets (bank accounts, securities accounts, etc.) in the name of the trust.
  • You can also name your living trust as POD (Payable at Death) or TOD (Transfer at Death) beneficiary on your bank, credit union, and securities accounts, as well as on life insurance policies. Upon the death of the last surviving owner of the accounts, or the insured on your life insurance policies, the proceeds will be immediately payable to your trust.

Funding Living Trust Prior to Death
If you create a living trust, you typically provide initial funding (even a nominal amount) when you create it and at various times later during your lifetime. If you want to avoid having your assets go through probate, you should make sure while you are living that either (i) your properties are titled in the name of the trust, or (ii) your trust is named as beneficiary.

Bank and Brokerage Accounts. You may wish to title any new accounts you open in the name of your living trust, and also change your existing accounts so they are titled in the name of your trust. An account held in the name of a revocable living trust can use the Social Security Number of any one of the living settlors of the trust, and income on the account is treated as earned by that individual for tax purposes. Keep in mind that once an account is titled in the name of a trust, only the current trustee and any co-trustee have the authority to access the account or execute transactions on the account. Your agent appointed in your power of attorney will generally not have access to these accounts unless your agent is also the currently acting trustee of your trust.

When opening a new account in, or converting an existing account to, the name of your trust, you may be required to execute a “certification of trust” in which you, as the trustee, attest to the identity of the current trustee and that the trust is still in existence.

When transferring a brokerage or securities account to your trust, you may also be required to have your signature on the transfer form guaranteed by an officer at your bank or other financial institution under the Securities Transfer Agents Medallion Program (STAMP). This is sometimes referred to as obtaining a “Medallion.”

Insurance Policies. If you would like your trust and, ultimately, the trust beneficiaries to receive the proceeds of any life insurance policies you own that are written on your life, you will need to designate the trust as the beneficiary of the policy. As with bank and brokerage accounts, the insurance company may require the trustee to provide, on its form, a certification of trust attesting to the identity and authority of the trustee.

Real (Deeded) Property (land, houses, etc.). If you wish, you can retitle your real property in the name of your living trust while you are living. To do so, you must execute and file a transfer deed. This is particularly useful for land that you own in another state because if you die owning it in your name, your survivors would need to open another separate probate proceeding for the land in the other state.

MUST I PROVIDE MY ENTIRE TRUST DOCUMENT WHEN DEALING WITH THIRD PARTIES SUCH AS FINANCIAL INSTITUTIONS?

Most states have adopted a version of the Uniform Trust Code (“UTC”). Under the UTC, a bank, securities firm, insurance company, or other third party transacting with a trust cannot require a copy of the entire trust document if, instead, the trustee provides a current and properly executed copy of a certification of trust. Most financial institutions have their own “certification of trust” forms that you or other trustees of your trust may complete. In addition, the third party institution may also request (and is permitted to do so) that the trustee provide “excerpts” from the trust that show the name of the trust, the names of the settlors and trustees (including any successor trustees), and the authorities given to the trustee