Do you find the whole subject of "estate planning" somewhat confusing and even mysterious?

If yes, then I believe you are in good company.

The objective of this brief guide is to define the essential terms and the process of creating and distributing a trust, helping you plan confidently.

In fact, a basic understanding of the process of creating and distributing a trust is essential when engaging an experienced estate planning attorney to assist you.

It is advisable to work with an experienced estate planning professional to tailor a trust that meets your specific needs and help guide your trustees through the intricate financial duties of managing the trust.

How Is a Trust Created Anyway?

Basically speaking, a trust is a legal document that outlines how your assets will be managed during your lifetime and after your death.

The trustmaker, also known as the grantor, settlor, or trustor, creates the trust.

This individual has the legal authority to transfer ownership of their property or assets into the trust.

Upon the trustmaker's death, they are referred to as the decedent.

The trustmaker supplies the assets within the trust through a process known as "funding" the trust.

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Step 1: Decide What Assets to Place in the Trust

The first step in establishing a trust involves deciding which assets you want to include.

Assets are property or valuable items, both concrete and digital, that transfer ownership from the grantor to the trust.

They can range from cash, real estate, stocks, bonds, and business interests.

Step 2: Identify Your Beneficiaries

Next, determine who will benefit from the trust, known as the beneficiaries.

After yourself, as the initial beneficiary, the "remainder" beneficiaries could be family members, friends, or charitable organizations.

Step 3: Determine the Rules of Your Trust

The trustmaker also sets the trust rules for how assets should be distributed or given to the beneficiaries.

The funds could be used for educational purposes, as a steady income, or as a lump sum upon reaching a certain age.

Step 4: Select Your Trustee

The trustee's job involves managing the trust's assets to a high level of responsibility and dedication, called fiduciary duties.

They ensure that all distributions to beneficiaries are made according to the trust rules, and fund management may last several years.

So, who should you appoint as your trustee?

The trustmaker can choose a trusted individual or a professional institution to serve as trustee or even both together.

I call that latter approach the pro-am, pairing a trusted "amateur" with a "professional" individual or institution.

Step 5: Drafting and Funding the Trust with an Estate Attorney

Create your trust by drafting a legal document with an estate planning attorney.

Lastly, the trustmaker must "fund" the trust or transfer ownership of all assets, known as the principal, that the trust will manage.

While your estate planning attorney may advise you regarding trust funding and beneficiary designations, much of the implementation is best handled through your financial advisor.

For the trust to have legal authority over assets, assets must be placed in the trust.

How are Assets in a Trust Distributed to Beneficiaries?

Trust administration is the process of managing the assets, distributions, and filings of a trust after the trustmaker’s death.

These tasks can often be complex and time-sensitive, making the professional guidance of an estate planning attorney, financial advisor, and CPA essential.

The trustee is responsible for managing the trust's assets, ensuring that distributions are made in accordance with the trust document, and fulfilling other fiduciary duties.

Step 1: Notification and Documentation

The trustee will gather all necessary documents, including the trust agreement and death certificate.

They must notify all beneficiaries and related parties about the trustmaker's death and the start of the trust administration process.

Step 2: Trust Asset Management

The trustee assesses and manages the trust's assets.

This may include liquidating assets, transferring titles, and ensuring proper valuation.

The trustee must also maintain detailed records of all transactions and decisions made.

Step 3: Financial Obligations

The trustee is responsible for settling the trust's debts and obligations, including paying taxes.

Before distributing assets to beneficiaries, they must ensure that all financial responsibilities are met.

Step 4: Distribution of Assets

Once all financial obligations have been met, the trustee distributes the assets, which involves making a payment or giving property from the trust to the beneficiaries based on the trust terms.

Depending on the trust's specific stipulations, this could take the form of lump sums, structured payouts, or ongoing distributions.

Step 5: Ongoing Trust Management

If the trust is designed to continue over time, the trustee must manage it according to its terms.

This includes ongoing investment management, tax filings, and distributions to beneficiaries as required.

Trust Terms Definitions

• Beneficiary: Individuals or entities named by the trustmaker to inherit the assets in the trust.
• Fiduciary: Someone obligated to act in the best interest of another, such as a trustee for a beneficiary.
• Funding: The act of transferring assets into the trust is essential for its effectiveness.
• Trustmaker: The person who establishes a trust. They are also known as the grantor, settlor, or trustor.
• Distributions: Making payments or giving property from the trust to the beneficiaries as outlined in the trust's terms. Depending on the trust's rules, this can include periodic payouts, lump-sum disbursements, or specific allocations of property.
• Principal: The original assets placed into the trust, excluding any earnings like interest or dividends.
• Trust: A legal document that outlines how your assets should be managed during your lifetime and after your death.
• Trust Administrator: A professional responsible for overseeing a trust managed by a financial institution.
• Trustee: The organization or person tasked with managing the trust.

Understanding these terms and the steps to creating a trust can empower you to make informed decisions about your estate. Consult with an experienced estate planning attorney to help you navigate these processes and establish a trust that aligns with your wishes and efficiently provides for your beneficiaries.

This post is for informational purposes only and does not provide legal advice. You should contact an attorney for advice concerning any particular issue or problem. Nothing herein creates an attorney-client relationship between Harvest Law KC and the reader.

References: U.S. Bank "Trust Terms You Need to Know" and American Bar Association "Glossary of Estate Planning Terms: Estate Planning Information & FAQs"