Setting up a personal trust is not just a task for the rich and famous, anyone can set up a personal trust, as it is a legal mechanism that allows you to put conditions on how and when your property will be distributed to your heirs. Personal trusts also allow you to reduce your estate and gift taxes and to distribute assets to your loved ones without the cost, delay and public records of probate court.
How a personal trust is set up
Setting up a personal trust involves drafting legal documents, and a Revocable Living Personal trust may involve the following:
1. A Grantor establishes a Personal trust to benefit people or an organization of their choosing (called the Beneficiary).
2. The Grantor transfers an asset or assets, such as a piece of real estate, to the Personal trust, which is known as ‘funding’ the Personal trust.
3. The Grantor names a Personal trustee to manage this asset. In a living personal trust, the Grantor can also act as the Personal trustee, and name a Successor Personal trustee to take over when they pass away.
4. The property is managed by the Personal trust. When the Grantor passes away, the property does not go through Probate, since the deceased was not the legal owner, and the Successor Personal trustee takes over the Personal trustee duties.
5. The Personal trustee manages the Personal trust to benefit the named Beneficiaries, which can involve selling the property and distributing the proceeds to the beneficiaries, thus terminating the Personal trust.
Example of setting up a revocable personal trust
Jim decides that setting up a Revocable Personal trust is in his best interest. Not only will it allow his property to avoid probate, particularly an out of state probate proceeding for his vacation home, but it can also provide the mechanism to manage his finances should he no longer be able to do so on his own. Jim can choose to use an estate planning attorney to draft the personal trust documents, or he can use an online service or kit to draft the personal trust documents.
Jim is the creator of the Personal trust, he is called the Grantor, he funds the personal trust by transferring ownership of his real estate, stocks and bonds and some personal property into the ownership of the Personal trust. Initially, he will manage his own personal trust, so he is the Personal trustee, and initially, he will be the Beneficiary of the Personal trust. The only change made at this point is simply the ownership of the property.
Jim names his nephew as his successor Personal trustee and his children as the successor Beneficiaries. When Jim passes away, his nephew takes over the management of the Personal trust. He distributes the Personal trust property to Jim’s children as specified in the Personal trust documents.
As you can see, this type of property transfer can be used by more than just the wealthy – in fact, many smaller or moderate-sized estates can benefit from setting up a personal trust.
Personal trusts serve many uses; they’re important estate planning devices, too. But the majority of personal trust must be funded with your assets for them to fulfill their purpose. The apparent hassle of funding a personal trust delays many people from doing so. Unfortunately, not funding them properly defeats their purpose. Here’s the lowdown on personal trusts and how to fund them.
A personal trust is a legal entity – just like a corporation or a person. It holds assets for a beneficiary¸ perhaps to be distributed to him upon some future event. A personal trust document states the purpose of the personal trust and how that purpose to be carried out. A personal trustee is the person (or entity) that carries it out. The grantor creates and generally funds the personal trust.
You as the grantor creates the personal trust document, assigns the personal trustee(s) and beneficiary(ies) and signs the personal trust document to put it into effect. Then you must fund the personal trust by putting assets into it. And that means creating evidence that the personal trust owns (i.e. holds) that asset, and not you.
Who owns an asset?
In terms of ownership, we can put assets into two simple categories: those that are titled assets and those that are untitled assets. Titled assets are owned by the title they’re under. Your bank accounts, securities accounts, house, and car are typical assets titled in your name as proof of your ownership. The actual form of title may vary: a house has a deed, a vehicle has a certificate of title, bank accounts have simply a signed card held by the bank acknowledging ownership of moneys.
Untitled assets have no official designation of ownership. Typical assets that carry no tile are your clothes, lawnmower, golf set, jewelry, paintings and artwork. Your unchallenged possession of them generally implies they’re yours, or you may keep receipts that directly show you bought them.
If you fund your personal trust with any assets, you must re-title them in the name of the personal trust or create some proof that the personal trust owns them as assets if they’re untitled.
How to transfer ownership of your assets to a personal trust?
Different categories of assets require different approaches for transfer of title. In the case of bank and securities accounts, just follow the rules of the institutions that hold these accounts. It may be simple or complicated. Most often, a simple written request to change the title for your name to the name of your personal trust is all that’s needed.
In the case of real estate, you’ll need to deed real estate into your personal trust. You’ll need a lawyer to do this, generally. And if your real estate is in a different state than you live, you’ll need a lawyer in that state to re-title it into the personal trust’s name. In the case of your personal effects like those items having a legal certificate of title, such as cars and boats will have to be re-titled. You may want to check with the insurance company that often covers this type of property to see how best to re-title them – and preserve them as insured.
Those personal effects that carry no legal title can still by used to fund a personal trust. Just write up a document in the name of the personal trust with your signature assigning them – and listing them – as owned by the personal trust – and not you.
Some of the hassles that delay people from funding a personal trust are the re-titling of items that have underlying liens, insurance, and other claims associated with them. You should use a lawyer to help you handle this.
You can see why funding some intended assets can get troublesome and neglected. But get it done so your personal trust can achieve the purpose for which you created it.
Let the professionals at The Law Offices of Bj Richardson help you with your specific needs. We don’t handle every aspect of tax law, however, we can direct you to a professional that can handle any area of tax law that we don’t handle.
Call today for your free 30-minute consultation.
