Forming a Trust 101

End of Life Management Toolkit #7 | by Team Passare and Robert L. Shepard

5. How Trusts Work

Different types of trusts work in different ways and each have different goals, but in all cases, trusts are governed by the directions set forth in the trust agreement. As the settlor (creator) of the trust, you provide the rules that the trustee will follow. Typically, the settlor creates the trust by signing a valid trust agreement, and then adding minimal amount of assets into the trust corpus.

Trust Funding Options

If the trust remains unfunded, other than the minimal assets to make it valid, then the trust is considered inactive because there are no assets to manage. If the settlor, or someone else, adds assets to the trust by retitling assets into the name of the trust, or by making distributions to the trust from retirement accounts, a probate estate, or other source, then the trustee named in the document must manage those assets. The trustee can be the settlor, a family member, some other trusted individual, a professional bank or trust company, or a combination of these. The trust document will provide instructions on how the trustee should manage those assets, including when the trustee should pay out income and/or principal to the trust beneficiaries. The trust document will provide instructions on how the trustee should manage those assets, including when the trustee should pay out income and/or principal to the trust beneficiaries.

Trustee Powers

The trust document may also set forth the powers of the trustee to handle specific tasks, such as providing accountings of trust activities to the trust beneficiaries, paying taxes, and managing special assets or restrictions placed on certain beneficiaries. The document will also direct what happens if the serving trustee resigns or can no longer serve in that role, by naming a successor trustee or a method for naming someone else to take over that role.

The trust will continue until the trustee distributes all of the trust assets and terminates the trust, based on instructions provided in the trust document.

NOTE: Assets managed by the trust are not owned by the settlor; they are owned by the trust. As a result, when the settlor passes away, the trust assets do not need to be transferred through a probate process; the trust will direct what happens, if anything, at that time.
Now, take a few minutes to answer these questions about forming a trust:
  1. Who would be best for the role of trustee for your trust: the settlor, a family member, some other trusted individual, a professional bank or trust company, or a combination of these?
  2. What trustee powers would likely be most appropriate for your situation?
© Copyright 2017 Passare, Inc. All Rights Reserved.