When I went to law school I was certain that I would never, ever, not in a million years need to know anything about trusts. I was going to be an advocate for animals or children or the poor. What would I need to know about how to shelter a lot of money?
Well, it turns out I was wrong about a lot of things. First off, as a law student, you should plan to learn anything and everything—especially if it will be tested on the bar exam. Second, you just never know what you may end up needing to know. Even if I had become an advocate for animals in my professional life, fundraising for nonprofits requires some knowledge about trusts and other giving vehicles. Plus, trusts can be used for all kinds of purposes, not just sheltering money.
Basically, I was mistaken about what trusts were, their purpose, and why it was important that I learn about them. Here’s what you should know:
What Are Trusts
Trusts are essentially a special relationship where one party (the trustee) has the authority to hold property on behalf of the beneficiary. A trust is generally created by a trustor and can be created while the trustor is living or can be created in the trustor’s will.
A good example of a trust is when a parent, let’s say a mom, wants to leave her entire estate (a house, a couple of cars, a fat 401k, etc.) to her children if she passes away. But, when she drafts and signs her will, those children are only four, seven, and ten years old. If the mom dies that year, then her very young children could possibly inherit a lot of money. If you were ten years old and inherited a couple hundred thousand dollars, what would you do with it? Yeah, probably nothing productive like save it for your college tuition or invest it into your own retirement plan.
In this scenario, it would be wise for the mom to leave her estate to her children but in a trust. She would name a trustee, someone who was responsible enough to manage the assets, like a trusted friend or family member who was over the age of eighteen. She can stipulate the terms of the trust like prevent the kids (beneficiaries) from having access to the funds in the trust until they’re 18 or 25 or even 30, whatever mom wants.
In this way, the mom has ensured that her children still benefit from the estate but that someone responsible would manage those assets until the children are mature enough to do so themselves.
This is just one example of numerous possibilities for creating a trust. There are special needs trusts to benefit an individual with special needs. There are charitable trusts that benefit charities. There are trusts that only last for a certain amount of time. Trusts that are set up for retirement. Trusts to help protect assets from probate, etc.
The idea is still the same, however, regardless of the type of trust. Assets or property are managed by an individual (trustee) for the benefit of someone else (a beneficiary).
How To Create A Trust
It’s important to note that trust law can vary from state to state, so please review the statutes and regulations applicable to the state where you intend to practice. But, generally, a trust can be created by simply intending to create one. And, there must be an identifiable trustee as well as an identifiable beneficiary.
Basically, a trust must benefit someone (an individual or an organization like a charity), and there must be a trustee designated to oversee the funds.
The last step in creating a trust is to fund the trust. Very often people forget this step. They draw up documentation outlining the rules of the trust (when the beneficiaries can access the money, who will serve as trustee, etc.) but then they forget to have the assets they want placed into the trust.
Funding the trust means transferring title of property like vehicles or homes into the name of the trust. This could also occur when the trustor passes away and requests in their will that certain assets from their estate go into a specific trust.
Trusts Are Important
The truth is, trusts intimidated me when I was in law school. But, now that I’ve had some experience with them, they’re not nearly as confusing as I once thought. And, actually…I really enjoy estate planning and working with trusts now. To me, sizing up an estate and discussing the client’s goals is like solving a puzzle. How do I help this client achieve their goals in the most prudent fashion? What tools do I need to use to attain those goals?
Don’t let trusts (or any other subject for that matter) scare you. You as a law student are being trained to solve problems. Knowing about trusts will help you do just that.
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