Aloha, Aloha, I am Scott Makuakane. I am an attorney with the law firm of Est8Planning Counsel in Honolulu. You are watching the Eldercare Channel.
I’d like to talk with you for a couple of minutes about trusts. We have all heard of trusts but really, what are they? Well, trusts come in a lot of different categories. Two of the big categories are testamentary and living. You might not know exactly what a testamentary trust is, or at least you might not know you know, but you do know the term Last Will and Testament.
So a Testamentary trust is one that is created by the terms of your last will and testament. Testamentary trusts are very good for providing for management of your assets after you are gone, but they do absolutely nothing for you or your family during your lifetime because by definition they can’t exist as long as you are alive. So they don’t provide any protection in the event of incapacity. They do provide for management of your assets after you are gone.
So what’s a better way to go? Well, one way is what we call living trusts. Living trusts break down into a lot of different categories as well, but two of the big ones are what we call revocable and irrevocable. I’d like to show you an example of each.
This, ladies and gentleman, is an example of a revocable trust. You notice it’s got some assets. Now this dollar bill can signify anything that you can own. It can signify cash, it can signify real estate, stocks, your business . . . anything you can own. Now the way a revocable trust works is, it is kind of like the little red wagon in that, as you can see, it is open in the back. You can put assets in, you can take assets out. So you lose absolutely no control by creating a revocable trust and placing assets into it. You always have access to them.
Now the catch is that if you can touch what is in the trust, your creditors can too. So if creditor protection might be a concern, another kind of trust that you can consider creating is what we call the irrevocable trust. Irrevocable trusts are kind of like the revocable in that you can create them during your lifetime. You can put assets into them, and again an irrevocable trust can hold any kind of asset that you own. You put the asset in but then the lid goes on.
What the lid signifies is that you can’t get back in here any old time you want. There is some limitation in the trust agreement that governs this trust that says that maybe you can get all of the income for the rest of your life; you can just never touch the principal. Maybe it says you can never touch anything in this trust ever again. And there could be some really good estate planning reasons for doing that.
For example, maybe you want to give away an asset but not give away control over that asset. You want to give it to, let’s say a beneficiary who might not be able to hang on to it, who might not be able to manage it wisely. Well, you can give it to them by a way of a trust that is going to enable that beneficiary to benefit from the asset but yet not mess it up.
A couple other ways that an irrevocable trust protects the asset are, remember that the beneficiary can’t just touch it any old time he or she wants because of the terms of the trust agreement. Now because the beneficiary can’t touch it, neither can the beneficiary’s ex-spouse, neither can the beneficiary creditor—as long as the rule book for this Irrevocable trust is properly set up.
Now let me go back to the revocable trust for just a minute and talk about the reasons we might want to create one. Well, imagine that I am walking through life with my stuff in my hands and something bad happens. I become incapacitated or I die. What happens to my stuff? Well, it ends up in a mess on the ground. If the reason for that mess was I had become incapacitated, then someone is going to have to be appointed by the court to pick it up, manage it, pay my bills and make sure I’m taken care of. And it’s got to go through this court process that can be just as bad, if not worse than, a process that we have all heard about, maybe we are not familiar with, called probate.
Probate is one of those things that is awfully good to avoid. Well, so is conservatorship: so is the need to have somebody manage your assets for you by way of a court process during your lifetime.
Well, what I could have done instead of just carrying my assets through life is I could have created my revocable trust and put my assets into it. And remember I can always get them back out, if I want them. I can always get them back out if I need them.
Now the downside to this trust is that my ex-spouse, my creditor, would be able to reach in there as well. But maybe, just maybe, the idea of having a mechanism for protecting my assets from my own incapacity, for protecting them from a court process after I am gone, makes this revocable trust worth it. And depending on the kind of assets that I want to place in it, maybe I want to have assets that are going to be very, very accessible to me even though the downside is they could be accessible to my creditors.
And again I have got a rule book. In my estate plan there is a component called a trust agreement that says how this trust is to be governed. It says what goes into the trust; those are investment instructions. It says what comes out of the trust; those are the distribution instructions. It says who gets to pick up the handle and pull it when I am no longer able to; those are the successor trustee instructions. All set out in the rule book.
Now upon my death, I can say that my trust terminates and the assets go out to the beneficiaries. But remember: if the beneficiary can touch it, who else can touch it? Well, the beneficiary’s ex-spouse; the beneficiary’s creditor. Maybe I don’t want to benefit my children’s ex-spouses and creditors after I am gone. Maybe I want to make sure that the inheritance that I leave behind is going to be there for my family members, not people who are coming along and trying to take it away from them. So what I can do is rather than have my trust terminate and the assets go out to the beneficiaries, I can have a lid essentially clamp down on my trust so that my revocable trust actually, for the benefit of my beneficiaries, behaves an awful lot more like an irrevocable trust where I can give my beneficiaries just about unlimited control or the management of the trust or the distributions of the trust, but yet able to keep those creditors and predators (the ex-spouses and people like that) out of my children’s inheritance.
Well, there are a few things to think about when it comes to trusts. We have got and some really good reasons for creating both kinds.
Until next time, A hui hou!