Okay, pop quiz. Which of the following is the best definition of a "Trust"?
- A legal entity that holds title to your assets;
- The fiduciary relationship between a Trustee (legal title) and a Beneficiary (equitable title);
- A commodity in short supply among lawyers; or
- All of the above.
Any of these answers would've been correct. But the technical definition of a Trust (as that term is used in estate planning law) is really the fiduciary relationship that evolves over time, among 3 parties:
- The Settlor who creates the Trust;
- The Trustee who manages the assets of the Trust; and
- The Beneficiary who receives the financial benefit from the Trust.
The sooner you understand the role of each, the easier it will be for you to discuss your estate plan with your attorney -- but more importantly, impress your friends who also have a Trust, but don't understand how it works.
For example, let's say Harry and Sally create a Trust, and transfer ownership of their home to it. We would call them the Co-Settlors.
During their lifetimes, Harry and Sally manage the home, as Co-Trustees, and live in it, as Beneficiaries. Do you see how in our example Harry and Sally are each wearing three different hats?
Later in life, Harry and Sally might reach a point when they can no longer manage their financial affairs. It's time for them to transfer control to a Successor Trustee (often a family member, trusted advisor, or bank) who will continue to manage the home while Harry and Sally enjoy their golden years.
When Harry and Sally die, the Remainder Beneficiaries (often their children) will inherit the home, and the Trust will typically terminate.
In other blog entries, we'll cover the advantages of a Trust, such as the ability to avoid probate, plan around estate taxes, and control the timing of distributions to your loved ones.
For informational purposes only; may NOT be relied on as legal advice. For specific questions about your own Trust, please call 805.494.4569 to speak with an attorney about your case.