Estate planning is an essential aspect of life that many people overlook. Proper estate planning ensures you can protect your assets and care for your loved ones, even after you pass away. Learning the basics of trusts, specifically the differences between grantor vs trustee, can benefit you and your loved ones. Understanding these fundamental concepts will help you make informed decisions regarding estate planning for your family. So let’s dive in and learn about trust basics.
What Is a Trust?
A trust is an agreement between an owner of accounts and property (grantor) and another individual (trustee) who agrees to manage the funds and property. The trustee manages the trust on behalf of a third party (beneficiary). In most situations, a written document called a trust agreement lays out the instructions or rules governing the trust relationship.
Often touted as an alternative to a will, a trust is a legal structure that owns your accounts and property while living.
You can name your trust as the beneficiary of specific accounts and property (such as a retirement brokerage or other account) for a trustee to manage after your death on behalf of your heirs. Keep in mind that whether to name specific kinds of accounts (such as retirement accounts) as beneficiaries to a trust can be complicated. Make sure you speak with an experienced estate planning attorney before making these decisions.
You can establish a revocable trust while living and be the trustee for your own living trust. You can remain the trustee of a revocable living trust until you can no longer manage your financial affairs or until you pass away.
When a grantor dies, the chosen backup trustee, also known as a successor trustee, steps up and assumes the responsibility for managing the trust on the beneficiaries’ behalf.
The Grantor: Creates and Funds the Trust
In a trust, the grantor is the person who creates the trust and transfers assets into it. The grantor is also known as the trustor or settlor.
The primary role of the grantor is to establish the terms of the trust, including its purpose, the beneficiaries, and the assets. They also dictate how the trustee will manage, invest, and distribute the assets.
The grantor may also be their own trustee in the case of a revocable living trust. They can manage the trust or change the trust at any time in this case. It is important to note that the grantor can generally also be a beneficiary of the revocable trust, meaning they can receive income or other benefits from the trust assets during their lifetime.
However, with an irrevocable trust, the grantor is not generally the trustee. Instead, the grantor appoints a trustee responsible for managing and administering the trust according to the terms set out by the grantor.
The Beneficiaries: Benefit From the Trust Assets
The beneficiaries in a trust are the individuals or entities designated to receive the benefits of the trust assets. The grantor can name any person or organization to be a beneficiary of the trust, including family members, friends, charities, or even pets.
Beneficiaries can be designated to receive income from the trust during their lifetime or a lump sum payment at a specified time.
It is important to note that a trustee or grantor can also be a beneficiary of the trust. If a trustee is also a beneficiary, they must act impartially and in the best interests of all beneficiaries. However, in the case of a revocable living trust, the grantor(s) is usually the beneficiary of the trust until after their death.
The Trustee: Manages the Trust for the Beneficiaries’ Benefit
Whether reviewing your existing trust or creating a new one, you should understand the vital role a trustee plays in handling trust matters. They also provide for and protect your loved ones.
A trustee is a trusted decision-maker tasked with handling all matters related to your trust. Depending on the type of trust, you could be the trustee in the beginning. You may need someone else to act as trustee only when you cannot manage the trust. Or you could select a trustee to serve immediately.
When creating an estate plan, there are several types of trustees to consider. An initial trustee is the decision maker that immediately starts managing the trust’s accounts and property. You may be the initial trustee if you create a revocable living trust. However, for some irrevocable trusts, you must select someone else to be the initial trustee.
The Successor Trustee: Manages the Trust After Initial Trustee Cannot
The successor trustee is the next in line to manage the trust. This person may need to act because the initial trustee becomes incapacitated, dies, or steps down from their role.
You can have one trustee handle the entire trust. You can also name a separate trustee for any sub-trusts you later create. For example, you may name your children as the trustees for the sub-trusts that are created for their benefit at your death. In this instance, several trustees may act once the sub-trusts are created. However, they will only be responsible for their separate trust and have no control over other sub-trusts with their own trustees.
What does a Trustee Do?
Being a trustee involves many different important tasks, including the following:
- Managing accounts and property owned by the trust or sub-trust. Although the trust owns your funds and property, a person needs to carry out most transactions. If the trust owns an investment account, the trustee must watch the investments and request any adjustments that may be needed to ensure the best outcome for the beneficiaries.
- Keeping the trust beneficiaries informed about the trust. Although the trustee decides how to use trust accounts and property, they do so on behalf and in the best interests of the beneficiaries. A trustee is required to periodically inform the trust beneficiaries about the status of the trust. This information includes what the trust owns, how much it’s worth, its income, and its past expenses.
- Acting as a point person for trust matters. If beneficiaries have questions about the trust, the trustee is usually best suited to answer them. The trustee is also in charge of filing tax returns and participates in any lawsuits involving the trust.
And when a revocable living trust grantor dies, their successor trustee handles the distribution of assets, estate tax, income tax, paying creditors and debts, etc.
What to Look for When Selecting a Trustee or Successor Trustee?
While it may be advantageous for a trustee to be financially savvy or have a background in tax, law, or finance, they are not required qualifications.
When considering potential trustees, we recommend looking for someone with the following qualities:
- Ability to ask for help when needed. The trustee does not have to be an expert in every area of trust administration. They can get assistance from financial advisors, tax preparers, and attorneys at the trust’s expense to fully carry out their responsibilities.
- Be detail-oriented. Trust administration must compile a list of everything the trust owns and keep accurate records of income and expenses.
- Be organized. Depending on what the trust owns, how many beneficiaries there are, and the trust distribution plan, there may be many moving parts. The trustee must ensure they do not mix their personal affairs with those of the trust.
- Have good communication skills. It is essential that the trustee communicate with the beneficiaries, deliver necessary information, and be available to answer any questions that the beneficiaries may have promptly. A trustee must also be able to get along with the beneficiaries.
- Follow rules. Must follow state and federal laws, as well as instructions within the trust. While a trust may allow trustee discretion, the trustee sometimes must act in a specific way. Failing to comply with the trust rules can subject the trustee to potential civil and criminal penalties.
Who Can You Choose For Your Trustee?
Although the choice of trustee is serious, you have several options depending on your circumstances and what matters to you.
Remember that whoever you select as a trustee will manage the trust income and have the legal authority to handle all trust property. They may enact asset protection strategies but must always uphold their fiduciary duty to act in the best interests of the beneficiaries.
It is common for clients to select family members (spouse, child, parent, sibling, etc.) as trustees. Family members likely have an intimate knowledge of your wishes and values. Their knowledge can make trust administration easier when leaving decisions to your trustee’s discretion.
If your trustee is also a beneficiary, they may choose whether or not to accept compensation.
Close friends likely understand your values and wishes, making discretionary decisions easier. However, depending on your family dynamics, your close friends may not want to handle any potential conflicts. Also, if they are not beneficiaries, they may want compensation. If you compensate a trustee, your heirs may feel disgruntled about your trustee’s compensation.
Professional Third Party
If protecting your beneficiaries’ inheritances is important, a professional may offer additional protection. However, because trust administration is their job, they will require compensation likely higher than a family member or close friend.
How Trust Documents BYPASS Probate Court
A trust document keeps property and assets in the trust’s name for you. Probate is a court process in which a judge helps a personal representative or executor transfer assets in your name.
The probate court does not deal with the following assets:
- Assets owned by a trust (assets no longer in your name)
- Beneficiary-designated life insurance policies or retirement funds
- Pay-on-death accounts, such as a joint bank account with survivorship rights
A trust can bypass probate court altogether because you transferred your accounts and property into the trust’s name while living. Or you can also name the trust as the beneficiary of all your assets after death.
With a properly funding living trust, there is nothing for the probate court to transfer at your death. Everything is owned by your trust or transferred to the trust automatically at your death -you own nothing in your own name. And a trust can own virtually any type of account or property, from real estate to heirlooms to stock to bank accounts.
When a trust is structured correctly with the help of an experienced estate planning attorney, your affairs can stay out of probate court entirely. This process not only limits court costs but also maintains the privacy of your financial records while enabling your beneficiaries to enjoy the benefits of the trust without disruption or delay.
Why Set Up a Revocable Living Trust in North Carolina?
A revocable trust can transfer money, property, and legacies to the next generation in a harmonious, stress-free, and fair process.
Many individuals want to avoid burdening their loved ones with the complications and costs involved with a probate court.
Setting up a revocable living trust is often the best, most comprehensive option for helping your family avoid a lengthy and costly court-managed process.
Estate Planning to Avoid Probate Court for Your Loved Ones
Establishing a trust can seem complicated, and the process can initially cost more than preparing a will. However, if you are willing to invest in your loved one’s future, a trust can be your best option for avoiding probate later.
At Vail Gardner Law, our estate planning attorneys work with you to create an estate plan that protects your family. We help you minimize the likelihood of drawn-out, contentious, expensive court processes. And we help you plan for senior life while ensuring your loved ones inherit according to your wishes.
Forging the right estate planning strategy for your unique situation is crucial to protecting yourself and your family’s future. Give us a call today to learn more about the next steps for achieving the peace of mind you deserve.