Avoid Probate No. 6 – Trusts
- Explaining the history of and basic components of a trust
- Giving an example of an Alter Ego Trust
A reader shared a horrific story about a fight over his father’s estate and demanded to know: “Why are you not telling people that they can avoid all these problems by avoiding probate at all costs?”. He concluded noting “I will read your next column to see if you mention anything about avoiding probate when it comes to avoiding all the taxes and legal fees…”.
I took up the challenge. This is the sixth in a series about avoiding probate.
I recommend starting at the beginning. Let me know if you have difficulty finding the earlier columns and I’ll help you.
Buckle up for some fun. This week is about trusts.
The concept of a trust originated in medieval England. Landowners who went off to fight in the Crusades needed their lands to be managed and their families to be looked after.
They (the “settlor”) would transfer ownership of their lands to a trusted friend (the “trustee”) to hold and manage for the benefit of their family (the “beneficiaries”).
A written agreement, signed by the settlor and trustee would set out the terms of the arrangement:
- Indicating what lands and other property were being transferred to the trustee,
- Identifying the beneficiaries and indicating how the income generated by the property would be distributed to the beneficiaries,
- Setting out what compensation would be paid to the trustee for their efforts, and
- Indicating what would happen to the property on the settlor’s death.
The agreement would be signed by the settlor and the trustee.
Title to the lands and other property would then be transferred into the name of the trustee who had the full authority to manage the property under the terms of the trust agreement. This included selling the property after the settlor died and distributing the proceeds to beneficiaries as agreed in the trust agreement.
There would be no estate after the settlor’s death because the settlor no longer owned any property. All of their property had been transferred to the trustee.
That’s not so crazy. But things have changed over the last thousand years.
Present-day trusts have the same components:
- The person who sets up the trust to hold their property (the settlor),
- The trustee who the property is transferred to, who manages the property, and
- The beneficiaries who benefit from the trust property.
Where things get a little crazy is that with present-day trusts the settlor, trustee and beneficiary can be the same person!
There’s a particularly cool type of trust called an alter ego trust:
- You (the settlor) transfer your property to your alter ego (yourself as trustee). For example, if your name was John Doe, you would transfer your property (home, investments, vehicle, etc.) from your name into the name of “John Doe Alter Ego Trust”.
- You’ve named yourself as trustee, so you continue to have the full authority to manage the trust property.
- You’ve named yourself as beneficiary, so you have the full use and enjoyment of the property and income it generates.
- The trust agreement (yes, the one that you made with yourself!) sets out what happens on your death, i.e.
- who takes over as trustee, acting like an executor would act,
- who the new beneficiaries are, and
- how the new trustee is to divide the trust property between your named beneficiaries (just like your will would have done).
If you transfer all your assets into the trust, then you will die without an estate. No probate. No fight over a non-existent estate.
I have given an extremely basic description. Trust law is complex. And there are significant tax implications. One tidbit about the alter ego trust is that you have to be at least 65 years of age to set it up.
You should know that there’s also a joint spousal trust that works similarly, but only one of the spouses has to be at least 65.
Setting up and maintaining a trust costs some bucks, both legal as well as accounting. I am not currently equipped to provide these services. If you’re interested in looking into whether a trust might be beneficial for you and would like my recommendation for lawyers and estate tax accountants who do this work, let me know.
And if there’s interest, I’ll write additional columns about trusts at some point. Hit me with your questions.
