A trust is actually a quite simple concept, though it is often couched in such mystery as to make it look very complicated and difficult to understand. As we do things, we create trusts, manage them, and terminate them often, often in a single day.
Let us imagine we take our family to the beach for the day. If yours is like mine, that’s two parents and 4 kids. (Actually, I have twelve kids, but this is supposed to be kept comprehensible.) As usual, we get an early start, and leave the house about 11 after waking everybody up for breakfast at 7. Yeah, it takes about 4 hours after breakfast to get everybody ready to go and the car packed. The beach is about a half hour away (Don’t we wish!) so we arrive just before lunch time. After getting the beach gear set up in our favorite spot, voices start asking when lunch will be served. Being a good parent, (and not wanting to do it myself) I give money to my son, our oldest child, with instructions to go get food, and take his sister along to pick it out, reminding him to bring back the change with the food.
I JUST CREATED A TRUST. Let’s review the terms: Who is the Grantor/Trustor? That would be me. Who is the trustee? That would be my son. I trusted him to handle the money, make the purchase wisely, and to bring the food and the change back. Who are the beneficiaries? That is me, my wife, and the four kids. What is the term of the trust? This trust will last until the food is distributed, an accounting given to the grantor (me), and the remaining funds returned to the Grantor( me). And this trust, since it deals with unusually complex matters (selection of foods for children), even appoints an advisory consultant, the sister who picks it out. We’ll call it the Leavitt Lunch Trust.
Is it finished? No, the Grantor has expressed his trust, but two important steps remain. First, the trustee(Son) must understand and agree to accept the trust and be bound by its terms. Of course, in this case, he is likely to do so since if he doesn’t, he gets no lunch. But perhaps he thinks a reasonable fee should be paid. Or he objects to the appointment of an advisory consultant, especially this one, who has been teasing him all day about his strange looking swimsuit and tan lines. Assuming he confirms his understanding of the terms and expresses his acceptance, what remains to be done? The trust needs to be funded, i.e. something of value (money) must be transferred to the trustee(Son) from the grantor(me). Without this step, the trust exists, but is totally useless.
So, how is this like a popular estate planning trust, a revocable living family trust? Let’s look at the words. First, is the Leavitt Lunch Trust (LLT) revocable? Can the Grantor (me) cancel the trust and get his money back? It is silent on this, but if silent, revocable is presumed. As a practical matter, revocation would be difficult, as the trustee (Son) will be quickly out of communication with the grantor (me), and not likely to be listening to receive notice of the revocation. And once the purpose of the trust is done, and the food is purchased, the Grantor (me) is bound to the acts of the Trustee (Son). Just because he (Grantor, me) doesn’t like the corndog, once purchased according to the terms of the trust, he can’t revoke and get all the money back.
Is LLT a living trust? Yes, I think it is fair to assume the Grantor (me) was alive when the trust was created, though to look at his pasty white skin, there could be some doubt. Another kind of trust often seen is the Testamentary Trust. That trust is formed within a Last Will and Testament, and comes into existence only on the death of the testator/grantor. (Oh, aren’t lawyer types clever with their fancy words and all!)
Is LLT a family trust? Yes, all that really means is the grantor and the beneficiaries share some family connection. Here, there are three beneficiary relationships, each with their own effects. First is the relationship of the Grantor (me) to himself. Because of this, the trust is ignored for Federal Income Tax purposes. If somehow on the way to the food court, the trustee (Son) invested the money and earned income, that transaction would be reported on the Grantor’s (my) personal tax return as though the trust didn’t exist. Second is the relationship to his spouse. Because of that relationship, this gift to his spouse is exempt from Federal Gift and Estate Tax. The third relationship, with the children, that of a parent and child, is subject to that tax, but, unless you’re at the beach in California, that gift is probably less than the $15,000 per person annual exclusion for 2019.
So, are you as hungry for a beach visit and lunch as I am? Let’s see, who can we get to go for lunch? See me next week when we will discuss “Who Should I Make My Trustee?”
This is one in a series of articles by Richard Leavitt, a partner at Leavitt and Leavitt, PLLC. If you have any questions, let us know by email at Richard@LeavittLeavitt.com or Allen@LeavittLeavitt.com or call us at 702-562-4069. We’ll give you a personal answer as well as address the question as it fits into the series topics.