Folks, I can not even begin to tell you how many clients have said to me they have elaborate trusts set up and then when I ask them “what’s in that trust?” they stare at me with blank faces. It’s not their fault. It’s the fault of their financial professionals who neglected to tell them exactly how a trust works.
A Living Trust Must Own Something!
A trust is nothing more than an ownership entity. If you want your trust to work, it actually must own stuff.
My wife, Charlotte, and I own a 2010 Honda Odyssey. Because we own it we get to determine what happens to that Honda during our lives, incapacity and at death. No one else can control what happens to that Honda. We own it, we control it.
Say we really want to give it to our teenage daughter but we’re not quite sure she’s up to the task of taking ownership of a 2 ton vehicle. In this case, while we’re alive and in good health, we just give her the keys to drive it while we monitor her competence in controlling the vehicle. When we feel she is mature enough we transfer ownership of the Honda to her by changing the title. But notice, giving her the keys the vehicle is not actually giving her ownership. We still own the Honda and if she screws up, we decide she no longer has rights to its use. Make sense?
Ownership is Black and White
When we transfer ownership to her though we no longer have a say in what she does with the Honda. Now SHE owns it. She can sell it the next day. She can give it to an insane guy she met backpacking through Europe. She can drive it for 10 more years. It’s completely up to her at that point and not a doggone thing we can do about it.
So, ownership really is all or nothing; I own it or I don’t. I own it, I call the shots. I don’t own it, nothing I say matters. Quite simple actually.
But in some circumstances, this level of black and white may not serve the purpose of what you are trying to do.
Living Trusts Allow a Gradual Change in Ownership
Let’s go back to ownership of the Honda. Charlotte and I own it, but we don’t expect owning it for ever. Ultimately we’ll give it to our daughter. But we don’t want to do that yet, not until we’re convinced she will be mature enough to handle it.
A trust, and I’m talking ONLY about Living Trusts here, can act as a mid way point. With the help of our trusted, local financial planner and estate planning attorney, Charlotte and I set up a Revocable Living Trust (RLT) and changed ownership of the Honda to it. We actually no longer own the vehicle, the RLT does. However, we do still control what happens to the vehicle because we are Trustees of that trust.
In fact, nothing really changes functionally. We will still pay any capital gains tax that were made if we decide to sell. Any liability is still paid by us. In fact, if our daughter rams a school bus with the Honda we will still get sued as if we owned it. As Trustees, we still have all the rights and responsibilities to the vehicle.
Living Trusts Shine During Incapacity
Where the major benefit comes in with the trust though is if/when we are incapacitated.
Even in we both become in bad mental shape and can no longer make sound decisions, we will still have dictated terms of control of the vehicle because we named a Successor Trustee to manage it for us. Let’s say we chose Cousin Sally down the street as our Successor Trustee. And we told Cousin Sally it’s fine to allow Daughter to drive the Honda. And once Cousin Sally feels Daughter is responsible enough Cousin Sally can essentially gift the vehicle to Daughter.
Trustee Is The Most Important Person In A Living Trust
But that happens ONLY when Cousin Sally feels Daughter is up to the task. In this case, Cousin Sally, even though she doesn’t own the property, has control of it being the Trustee. The Trustee is the all-important role in the establishment of a Trust.
In our trust document we can allow Cousin Sally as much flexibility as we like. We can direct her to give Daughter the property when she wants or we can specifically state not to give her the property until a certain date.
Revocable Living Trusts Become Irrevocable At Death
The trust allows the continued control of our assets while we’re incapacitated but also even after we die. However, understand a Revocable Living Trust becomes IRREVOCABLE at our death. Irrevocable means it can’t be changed. Thus, if we made our trust quite stringent, there will be more hoops for Cousin Sally to jump through to adhere to our wishes.
In summary, a trust allows us to maintain control of our assets; While we are alive, if we’re incapacitated and after we die. But, the trust ONLY can do this if it actually owns the property to begin with. If we hadn’t changed the ownership of the Honda to the trust the trust is non-existent. It matters not what our document states for our wishes if the trust doesn’t own the property!
So, you say you have a trust. Great, what’s in it?