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B. The variations

B. The basic concept and its variations

Think of a Trust as an empty vessel into which the Grantor “pours” property. Like an Executor, a Trustee has the highest of legal obligations – a fiduciary duty – to manage the property, and see that it is used only in a manner, and for the purposes established by the Grantor in the Trust document.

In many cases, the Trust can remain empty (unfunded) for quite a while after its creation. In some states, however, some nominal funding (e.g., $100 in a bank account) is required. This is a good idea anyway. It shows that the Trust is more than a piece of paper, and that can be important in many situations.

Trusts can be “living” – established during the Grantor’s lifetime – or testamentary -established in a Will. A living Trust can be revocable – subject to termination or modification at any time by the Grantor for any reason – or irrevocable. As for testamentary Trusts, of course, a deceased Grantor is unable to change the terms of a Trust created under his/her Will, so these Trusts are always irrevocable. (Before death, however, the Grantor is certainly free to change his/her Will, including any testamentary Trust that is to be created.) If the Trust is irrevocable, the Grantor can never change or terminate it, or withdraw assets, even in an emergency. An irrevocable Trust is an independent entity under the law.

Although an empty Trust can exist, in order to function at all, a Trust must have assets formally transferred to the Trustee, with this title used in the documents of ownership. Even when husband and wife serve as their own Trustees, real estate deeds and financial accounts must be re-titled in order to be owned by the Trust. For a living Trust, legal title is transferred, during life, to: “John and Jane Smith, Co-Trustees of the Smith Family Trust, under declaration of Trust dated ____.” Financial institutions will also require authorization, in the form of the Trust document, before they will accept instructions from a Trustee.

It is important to note that testamentary Trusts require that the Will be probated. Moreover, these Trusts might then be accountable and have to report to the court, under state law – unlike living Trusts. These are significant drawbacks, without offsetting advantages. Yet many people choose the testamentary over the living Trust, maybe because it is more familiar.

Perhaps, too, the popularity of the testamentary Trust is due to people’s desire to avoid making any kind of property transfer presently, as should be done if a living Trust is created. The re-titling of assets into the Trustee’s name, discussed above, does not occur until after death and probate, if the Trust is established in a Will.

True, lifetime property transfers into a living Trust inevitably involve “paper work,” and the process might be a bit discomforting, even if folks understand the situation. This sentiment is perfectly reasonable. The “catch,” however, is that a testamentary Trust only delays the property transfers until somebody else has to bother with them, after your death. We suspect, too, that the other disadvantages mentioned are often not recognized.

F.Y.I. If you live in a community property state, and use such property to fund a living Trust, the Trust becomes the owner of the property, and it is “community” no longer. But the property should be clearly identified as having been community, and the Trust should specify that the property will revert to its community character if the Trust is revoked. Otherwise, the character of the property might become unclear. (The character of the property can be important in case of divorce, and it might also have tax implications.)

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