What is an Estate Planning Trust and How Does it Work?

Estate planning can be a complex and overwhelming process. First, you are probably learning about some very new and complicated legal topics. Second, many people find it a morbid process to plan for your eventual demise and the possibility of incapacity. However, it is important to learn about what an estate planning trust is, because it can help you plan for your assets after both death and incapacity. But what exactly is a trust, and how does it work? Let’s try to simplify the concepts to help you understand the legal fundamentals of trusts and their role in estate planning.

What exactly is a Trust?

While this is the subject of some legal debate, a trust is essentially a legal entity and is often treated as one under Arizona law. A.R.S. § 29-2102. A “legal entity” is an organization that acts through a person. For example, a corporation: it can own things and even open bank accounts, but must take action through a CEO or other agents. A trust is a legal entity which consists of a legal arrangement between the party (a person or legal entity) who establishes the trust and the party who manages the trust. The establishing party, known under Arizona law as the as the “Settlor” (and sometimes as “grantor,” “trustor,” or “trustmaker”), transfers assets to the managing party, known as the Trustee, for the benefit of a third party, known as the Beneficiary. Settlors create trusts through documents, known as a “trust agreements” or “trust declarations,” that outline how the settlor wants the trust assets managed and distributed. The Trustee manages the assets according to the settlor’s wishes, outlined in the trust agreement.

How Does Estate Planning Trust Work?

1. Creation of the Trust – the Settlor: Settlors create trusts through a document, usually known as a “trust agreement” or “trust declaration.” That document is usually a contract that outlines the terms and conditions of the trust: how the settlor wants the trust assets managed and distributed. A trust agreement specifies the trustee, the beneficiaries, and the assets the Settlor will place into trust.
2. Succession Plan: Estate planning trusts should always include a succession plan. The plan outlines to whom the settlor will turn over the trust, after the settlor dies. This includes both the management of the trust and the entitlement to the assets in the trust.
3. Transferring Assets to or “Funding” the Trust: Once established, the settlor “funds” the trust – the settlor transfers legal ownership of the specified assets to the trust. This can include real estate, investments, bank accounts, and business assets. This can include using a transfer deed to move a piece of real estate into the trust’s ownership.
4. Trust Administration – the Trustee: The trustee is responsible for managing the trust assets according to the settlor’s terms, as set forth in the trust document. This includes making investment decisions, distributing assets to beneficiaries, and ensuring that the trust operates in compliance with relevant laws. The succession plan usually includes “Successor Trustees” who take over if the current trustee is unable or unwilling to act.
5. Distribution – the Beneficiaries: The trustee distributes the trust assets to the beneficiaries as specified in the trust document. For most estate planning trusts, the settlor has the sole right to receive assets from the trust during his or her lifetime. The succession plan usually includes “Successor Beneficiaries” who are entitled to the trust assets once the Settlor has died. A well-drafted estate planning trust will also have “Contingent Beneficiaries” who are entitled to the trust assets if one or more Successor Beneficiaries has died.

Benefits of a Trust in Estate Planning

Estate Planning Trusts offer numerous advantages, including:

• Flexibility and Ease: Trusts can own almost any kind of asset: businesses, real estate, accounts, and even other trusts. Transferring an asset to a trust is usually a straightforward process which a lawyer or financial planner can assist you with. The trust’s succession plan usually can be modified during the settlor’s lifetime.
• Trust’s Succession Plan ensures Settlor’s Wishes are Met: Estate planning trusts include a succession plan that outlines to whom the settlor will turn over the trust, after the settlor dies. This includes successor trustees and successor beneficiaries. Most estate planning trusts become “irrevocable” after the settlor dies. This means that nobody can change the terms of the trust, and the settlor’s wishes must be carried out.
• Avoiding Probate: Assets held in a trust do not go through probate for two simple reasons: a trust is not a human and a trust does not die. The probate court process is meant to transfer assets from a dead person’s ownership, “the estate,” to live people’s ownership. An estate planning trust accomplishes this with its legal ownership of the assets and its succession plan. Simply put, there is no probate without the death of a human owner. The trust is an owner who is a legal entity and doesn’t die.
• Privacy: Almost all courts cases are a matter of public record, and probate court cases are no exception. Trusts are private documents – you do not have to register a trust with the state government, like with corporations, and trusts do not go through the probate process and become part of the public record, unlike a will does.
• Asset Protection: Some trusts can protect assets from creditors and legal claims. However, currently, domestic asset protection trusts are generally regarded as unreliable or undesirable asset protection. You likely cannot depend on an estate planning trust for asset protection.

Conclusion

Estate planning trusts are powerful tools in estate planning that provide flexibility, control, and peace of mind through the succession plan. Understanding the basics of how trusts work can help you make informed decisions about your estate plan. If you’re considering creating a trust, consult with an experienced estate planning attorney to ensure that your trust is tailored to your specific needs and goals.