Many clients ask me if they should have a trust. The client has heard of some person who has a trust, and they believe that a trust would be appropriate for them.
A trust is a fiduciary relationship in which one person, called the trustee, is holding assets (cash, stocks, bonds, mutual funds, real estate) for another person, called the beneficiary. A fiduciary relationship is one in which the fiduciary has the utmost duty of care to handle the assets of another person. So, with a trust, the trustee is the fiduciary, holding the assets of the beneficiary with the utmost duty of care.
The person who establishes the trust is called the grantor. The grantor places his assets into the trust. The trustee holds and invests the assets of the trust. And the beneficiary derives the benefits of the trust.
With many trusts, the grantor establishes the trust for the benefit of himself with some other person, such as his children, as remainder beneficiaries after his death. In such cases, the grantor also serves as the initial trustee of the trust, with one of the children serving in the role of successor trustee after the grantor’s death.
Because a trust is really just one person holding assets for another person, the trustee can invest the assets of the trust any way a person can invest assets. A trust could have its assets invested in multiple types of investments, just as a person could. For instance, you are probably “invested” in real estate in that you own your home. A trustee can invest in real estate by owning a home in the name of the trust for the benefit of the trust’s beneficiary.
You probably have a checking account. A trustee could have a checking account in the name of the trust. You could invest in CDs, stocks, mutual funds, and annuities. A trustee could invest in CDs, stocks, mutual funds, and annuities.
If Joseph Smith were invested in stocks, the stocks would simply be titled “Joseph Smith.” If Joseph Smith were the trustee of a trust for the benefit of his nephew, Mark Jones, then the stocks would be titled “Joseph Smith, Trustee, of the Mark Jones Trust.” Titling the stock in this manner would show that Joseph Smith is holding the stocks for the benefit of Mark Jones in a trust.
If Joseph Smith wanted to invest the assets of the trust in real estate, mutual funds, annuities, bonds, etc., all of the accounts or assets in which the trusts was invested would be titled “Joseph Smith, Trustee, of the Mark Jones Trust.” The trust could invest in one asset or twenty assets, just as you could invest in one asset or twenty assets.
The only limitation to the manner in which the assets are invested is that the trustee must always bear in mind his duty of care to the beneficiary. When it comes to investing, the trustee must be guided by the Prudent Investor Rule. The Prudent Investor Rule requires the trustee to invest the assets of the trust in a prudent—careful—manner.
Whether a client needs a trust or would benefit from a trust is always a question of fact given the client’s particular set of circumstances. A trust is not the right choice for every client.
Many trusts are revocable, meaning that the grantor of the trust can amend or completely revoke the trust any time the grantor chooses. Revocable trusts often come in handy for estate planning purposes when a client owns real estate in another state, for instance, in Florida.
An irrevocable trust is a trust that cannot be amended or revoked by the grantor. The grantor could designated another person, such as the trustee or someone else, who could modify or terminate the trust, but in order to be irrevocable, the grantor cannot retain the power to modify or terminate the trust. Irrevocable trusts are often used to remove assets from the name of the grantor and gift those assets to other persons.