What is a Trust?
“Help me!” cried my 89 year old great Aunt Ethel over the phone. Ethel was frightened and confused. She had listed her house for sale and was meeting with the realtor, who was pressuring her to sign a sales contract. As it turned out Ethel had dementia and was unable to make decisions on her own. Helping her clean her house, we discovered her trust papers. Many years ago she had “put her affairs in order.” She had a Revocable Living Trust. A Revocable Living Trust, also just called a living trust, is a written legal document created by you to hold and manage your assets. Assets are invested and spent for your benefit. A trust keeps you in the driver’s seat during your entire life and even after death. There are different types of trusts. I don’t recommend you prepare a trust yourself. Unless you are sophisticated and really understand what you are doing, hire an attorney that specializes in preparing trusts. I know a lot of people feel uncomfortable going to an attorney. For one thing, they are expensive. Also, how do we know if the attorney we chose knows what he/she is doing? Most people feel that an attorney can rip them off and they wouldn’t even know it. It’s a common fear. How do you find a good attorney? Ask. Ask your friends. Ask your family. Ask your neighbors. Ask me, your CPA. Talk to everyone you know. Once you have a few choices to select from, call the attorney. Get a feel for how you are treated over the phone. Compare fees but don’t let the fee determine which attorney you choose. Beware! As the old saying goes, “There is nothing more expensive than a cheap attorney.” Creating a trust is only the first step. Think of a living trust as a bucket. The trust document is the bucket itself. When the trust bucket is first created, it is empty. The trust bucket needs to be filled or funded with assets. It is not wise to put all assets in a trust. There are many different factors to take into consideration when deciding which assets belong in a trust and which do not. Your attorney can help and provide valuable information. Funding a trust can be time consuming. Most people will transfer their bank and investment accounts, real estate and business interests. To harvest the full benefits of a trust, you must go through this laborious process. Don’t let the funding process deter you or stop you from creating this important document. Since trusts are very common, most banks and investment managers can help you with this process. As the creator of the trust, you control the assets in the bucket. As long as you are living the IRS looks at you and your bucket as one. You can include the income from trust assets on your personal tax return. For example, if you have a savings account in your trust bucket and it has earned some interest, the interest is taxable. You can report the interest on your own return. There is no need to get a special tax ID number or file any additional tax forms for your trust bucket. When you pass away the trust need to file a trust tax return. A trust is an estate-planning tool. It is not a tax-reducing tool. While you are still alive and mentally alert changes can be made to your trust bucket. You can change beneficiaries and successor trustees and you can add or remove assets. As a parent, you can name a guardian for your children. You can also name the person who will handle assets on behalf of your children. This doesn’t have to be the same person. A trust gives you choices for how you want your assets to be managed after you pass away. If you only have a Will and not a trust, probate will have to be filed in court. The court has to follow the law and not necessarily what you want. Probate is expensive, an extremely slow process and it is also a public record. A trust keeps your affairs private. A trust is not a public document. A trust can also help you if you were to become incapacitated. If you are unable to understand and handle your affairs, the successor trustee can take control of your assets. This can keep you from being taken advantage of or stolen from. When you pass away, your successor trustee takes over your bucket. Their job is to distribute your assets to your beneficiaries. When you pass away your trust is now irrevocable and cannot be changed. For Ethel, I became her successor trustee. I was able to stop the realtor from selling her house below market value to a relative. I later sold the house to a young family that paid current market value. Her trust kept her from becoming a victim. By: Cindy Schoelen, CPA