Erin Grabe

Apr 22 2015

Understanding Trusts (Part 2 of 4)


Getting Started with Estate Planning
This is the 2nd in a 4-part series on Estate Planning.

A Trust is a legal document that is used in Estate planning. There are many reasons to set up a Trust including providing for minor children or family members who are inexperienced or unable to handle financial matters, providing management of personal assets should you be unexpectedly unable to handle them yourself, or even reducing Estate Taxes and providing a liquid way to help pay for them. A Trust provides privacy because it’s terms are not public knowledge.

Generally speaking, Trusts can usually be divided into two categories: Revocable and Irrevocable.

Revocable Trusts.

A Revocable Trust is, as the name indicates, revocable. It can be changed, altered, amended, or revoked altogether by the creator (Grantor) of the Trust. The Revocable Trust is used in Estate planning in lieu of a Will. If the Grantor creates a Trust and puts all of his or her assets in the name of the Trust, upon the Grantor’s death, the Trustee will distribute the assets according to the Trust document without opening an Estate through the court system. In some instances, avoiding probate can be efficient.

A Revocable Trust usually provides the Trustee with three instructions:

  1. What happens to your property while you are alive
  2. What happens to your property should you become incapacitated
  3. What happens to your property at your death

People utilize Revocable Trusts for a variety of reasons. Some use them for the greater privacy afforded at death. Others use Revocable Trusts for continuity of management. If the Grantor becomes incapacitated, the successor Trustee can generally step in and manage the Trust assets without necessity of any court proceeding.Revocable Living Trusts can also be helpful in situations where the Grantor owns real estate in more than one state. Owning property in multiple states at death requires a probate proceeding in each state, unless the land is all held in the name of the Revocable Trust.

Irrevocable Trusts.

In contrast to a Revocable Trust, an Irrevocable Trust cannot be amended. These usually arise in one of two situations:
1) The Grantor of a Revocable Trust has become incapacitated or has died.
2) The Grantor has put property into a Trust for the benefit of another, such as a spouse, children, charity, etc. The Grantor relinquishes all rights of ownership to the property put into an irrevocable trust.

Combinations.

Many people utilize combinations of Revocable Trusts, Irrevocable Trusts, and Wills in their Estate Plans.

Trust in a Will: Often, Wills include provisions creating Trusts. For example, a parent might want to set up a Trust within the Will so that if the parent dies prior to the child reaching a certain age, the assets can be managed on behalf of the child. This is called a Testamentary Trust.

Will and a Trust: Even if you choose to set up a Revocable Living Trust, your Estate Plan will likely still include a Will called a “pour-over” Will. The Will instructs that if any property is not properly titled in the name of the Trust, it should be put in the Trust at death.

Trust in a Trust: A Revocable Living Trust may contain provisions that create one or more Trusts for the property at the Grantor’s death. This works the same as a Trust in a Will, as noted above.

Selecting a Trustee

A Trustee is responsible for more than just gathering and distributing assets. Other important duties include accounting and reporting requirements, investment responsibilities, and tax and legal compliance obligations. For these reasons, you should choose wisely when selecting a Trustee. Important qualities to look for include:

  • Investment knowledge
  • Tax knowledge
  • Record-keeping skills

Corporate Individual Trusts

Corporate vs. Individual.
When deciding between an Individual Trustee, Corporate Trustee, or both, consider the following factors:

  1. Competency: Most importantly, you should be confident your Trustee possesses sufficient business skills and knowledge to make reasonable decisions concerning the Trust. A corporate Trustee may offer a depth of expertise that an individual may not possess. A Trust Department, such as Hills Bank Trust and Wealth Management, offers a team of experts capable and experienced in performing all of the Trustee duties.
  2. Duration of Trust: For Trusts that may last many years, an individual Trustee may prove problematic. Corporate Trustees can offer greater stability and continuity.
  3. Impartiality: A Trustee must fulfill their fiduciary duty by remaining impartial and unbiased, especially when the Trustee is empowered to make discretionary distributions.
  4. Familiarity: A Trustee should be familiar with the goals of your Trust and your family situation. Knowing the Trust goals is only part of the job of a Trustee; legal skills, investment experience and knowledge, and objective fiduciary oversight are all important requirements to consider. Goals and family dynamics can also be learned by planning a meeting before your Estate Plan is finalized. At Hills Bank, we welcome the opportunity to meet with you and answer questions about how we would handle certain situations and gain insight into your goals and concerns.

Please visit our blog, HillsHelps.com, next Wednesday for the 3rd part of our 4-part series covering essential Estate Planning topics.

This post is for information purposes only and should not be interpreted as providing legal advice. You should consult an Estate Planning Attorney before executing any legal documents. Investment products are not a deposit, not FDIC insured, not insured by any government agency, carry no bank guarantee, and may go down in value.

View the complete 4-Part Estate Planning Series:

Erin Grabe

About Erin Grabe

Erin Grabe is a Trust Officer at Hills Bank’s North Liberty Location on Forevergreen Road. She serves customers in the areas of estate planning, estate administration, and personal trust administration. Erin earned her undergraduate degree at the University of Kansas and is a graduate of the University of Iowa College of Law. Erin can be reached at erin_grabe@hillsbank.com.


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