One of the components of estate planning that can help protect your assets and ensure that they are transferred to your beneficiaries is the creation of a trust. What is a trust agreement? Essentially a trust is a fiduciary agreement where you select a third party to oversee your estate on your behalf. During the creation of a trust, you will come across several documents. The two most important documents are the agreement itself and the certificate of trust. It is important to understand what an agreement like this is and how it plays a role in estate management.
THE LEGAL DOCUMENT
What is a trust agreement? This is a document in estate planning that legally permits you to transfer ownership of your estate/assets to a third party. The individual who is creating the trust is called the trustor or grantor and the third party who will manage the estate/assets is a trustee.
The key function of a trust agreement is to ensure that the trustee can legally manage and oversee your assets on your behalf. The trustee may be an individual or a legal entity, such as an LLC. The trustee will be responsible for the distribution of the assets in the trust to the beneficiary, according to the stated wishes in the document.
WHAT IS A CERTIFICATE OF TRUST?
A certificate of trust is a legal document utilized by the trustee to show that he or she has the authority to act on behalf of the trustor and trust. Frequently, the trustee will need to show the certificate of trust to third parties, such as lenders, financial institutions, or banks, when conducting a business transaction on behalf of the trust.
DIFFERENCES BETWEEN THE AGREEMENT AND THE CERTIFICATE
Both the agreement and certificate of trust are vital documents used for estate planning but they each serve a different purpose. The agreement is the primary document that contains all the information regarding the trust, including its agreements and dispersal of funds to the beneficiaries. This agreement is between the trustor and the trustee. On the other hand, the certificate of trust is used by the trustee to reveal his/her legal standing to third parties. The certificate of trust will usually verify the following information:
- When the trust was created
- Names of the trustor and trustee
- What type of authority has been granted to the trustee
- Any title to real estate property
- Taxpayer ID (usually a Trust EIN – this is obtained from the IRS)
Whenever the trustee conducts any type of business transaction on behalf of the trust, he or she should be able to produce a copy of the certificate of trust. Lenders and banks will always ask the trustee for the certificate of trust to verify the trustee’s legal authority. Without the certificate of trust, the trustee will not be able to undertake any type of business-related function, including investment, buying or selling of real estate, or withdrawing money from a bank.
The three key participants when it comes to the creation of a trust are:
- The grantor, also known as the settlor or trustor, is the individual who creates the trust as part of his or her estate planning. The trust will permit the grantor to transfer any assets and/or real estate property to the trust.
- When creating a trust, the grantor will also name a third party as the trustee. The trustee may be a person (s) or a legal entity. The role of the trustee is to oversee and manage the assets placed in the trust on behalf of the trustor.
- The trustor will also list a beneficiary or beneficiaries who will receive the assets from the trust. Beneficiaries in most cases will include family members, such as a spouse, children, or siblings. The trustor will also set up instructions on how and when the assets should be distributed to the beneficiaries. For example, the trustor may state that the child gets $2,000 a month but only after he or she reaches age 20, or that the daughter gets $20,000 a year for four years to support her college education. The trustor is at liberty to write any type of instructions on how the assets should be distributed.
WHY CREATE SUCH AN AGREEMENT?
What is a trust agreement? Why create one? The chief reason why an agreement like this is created is because it allows the trustor to select someone to manage his assets. Secondly, the agreement can specify the terms of inheritance for the beneficiaries. Further, one can create a trust to protect assets from creditors. Another useful reason for this agreement is when the beneficiary is underage, disabled, or mentally incapacitated and not able to manage finances. Therefore, one can create a trust agreement that dictates how these individuals will receive money so that they will be looked after financially; in addition, it ensures that the beneficiaries will not spend all the money in a short time. However, this type of agreement does require time and money to create, and cannot be easily revoked.
BENEFITS OF A TRUST
Having a trust has several key benefits that include the following:
1. Bypass probate
Probate is a very long and expensive venture. Even the simplest cases can take months to resolve and at the end of the day, it will reduce the assets that were meant for the beneficiaries because of the numerous fees associated with it.
2. Lower the taxes on your estate
By transferring your assets to a trust, you can lower the taxes. However, there are different types of trusts, and the amount of tax reduction varies. You will need to consult with an estate lawyer to determine which type of trust is most favorable to you for tax relief.
3. You have control
One of the best things about a revocable trust is that you have control over your assets while you are alive. You are free to amend and alter the instructions for the distribution of the assets, add or delete names of beneficiaries, and even select a new trustee. What this type of agreement does is allow you to state how and when you want your assets distributed. A trust offers extra protection over your assets, meaning that the beneficiaries are not at liberty to spend it the way they want.
WRITING THE AGREEMENT
To write a proper and effective trust document, the following must be included:
- The agreement should clearly define the grantor or the trustor. In addition, it should also name and clearly define the trustee – the individual or legal entity who will be in charge of the trust.
- Because there are many types of trusts, clearly state what type of trust you are creating. For example, the different trusts include charitable, spendthrift, special needs, etc.
- The objective of the agreement should be clearly outlined. For example, if the agreement is to distribute the assets to the beneficiaries, the names of all the beneficiaries and how and when the assets will be distributed should be clear. If you place real estate in a trust, this becomes known as trust property.
- If you want to establish rules and guidelines for your trust, you should state them. For example, you may want your child to receive the trust funds only after he or she finishes college, or your only child will get $2,000 a month after age 18 until he or she gets married. You have to consult with an estate attorney because different jurisdictions have different rules on how it is interpreted.
- The agreement must be signed in the presence of a public notary to avoid any legal challenges in the future.
Hopefully, you now have an answer to, what is a trust agreement? And you now know that a trust agreement is best created in consultation with an estate lawyer. Whatever you want in your agreement has to be clearly stated at the beginning. At Elder Law, P.A. we are highly experienced in this field and would be happy to answer any questions you might have. Call us at 1-561-933-4465 to learn more.