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Trusts are like "piggy banks" that are created when the trust is signed. The process of dropping the "coins" into the piggy bank is called funding the trust. Funding the trust is a simple process of signing documents changing the owner from the name of the person to the name of the trust. Voila! The trust is funded.

For retirement accounts, like an IRA or 401K, the owner cannot be the trust, but the trust can be named a beneficiary, so the trust is permitted to accept retirement accounts upon the death of the person. For a trust to receive retirement benefits certain important language must be placed in the trust.

Not everyone needs a Trust. I only recommend a Trust if it is needed for particular a purpose which is discussed in this column.

Revocable Trust
The most well-known trust, the Revocable Trust is a so-called a "Living Trust."  It is called a Living Trust because it can be amended and/or revoked. 

These are my top eight reasons to create a Revocable Trust:

  • to avoid or minimize estate taxes;

  • to avoid having to file multiple probate matters, one in each state where real property is owned;

  • to stretch out payments to beneficiaries over time;

  • to manage money in a flexible way in complex family situations;

  • to set up education funds;

  • to take care of two sets of beneficiaries, such as a married couple each with children from a previous relationship;

  • to set up a system for the management of a family home intended to be preserved for one or more generations; and,

  • yes, to avoid probate.

Pour-Over Will
For revocable trusts, the person who creates the trust, called the Grantor, can fund it immediately, entirely or partially; or leave it empty until the grantor passes away. In a revocable trust, the grantor is almost always the first trustee.

At the time of the grantor's death, if the grantor left some or all of his/her assets outside the trust, the "pour-over will" is filed in probate court, which essentially means the assets outside the trust are "poured" into the trust.

Here's an example.  Let's call the grantor Suzy. Suzy wants to create a revocable trust for one or more of the reasons I listed above. If she wants to avoid probate she must transfer all of her assets into her trust while she is alive. If she forgets one asset, like that bank account she opened up 50 years ago because the bank gave her a free iron, a decree from the probate court must be obtained before Suzy's beneficiaries can collect this money.

Unfortunately, and often, the family finds this out because the bank will not allow access to that account. I get the call from a beneficiary, who says. "The banker said mom's money is 'frozen’." The banker knows Suzy died and she was the sole owner of her bank account. A decree from probate court must be obtained before the bank can release Suzy's money.

On the other hand, if Suzy had changed the name of that account into "Suzy, trustee of the Suzy Revocable Trust," no probate administration would be required.

Special Needs Trust
An example of an underutilized trust is a special needs trust, referred to as an "SNT." There are two types of SNTs: first party and third party.

First party means it is the beneficiary's money, while third party means it is the money of someone other than the beneficiary.

Both types of SNTs shelter money and other assets for the benefit of a person who is receiving public benefits or who is unable to manage their own financial matters. If possible, it is better to create a third party SNT because there are much fewer limitations on the use of the trust funds.

Unfortunately, I see this scenario too frequently: Dad dies, a few years later mom dies, leaving $200,000 and her home to her three kids. When her permanently disabled child, let's call him Bill, receives his one-third inheritance from mom, he loses all of his public benefits because he now owns more than $2,000, which disqualifies him from SSI and other public benefit programs.

I have to do quick work preparing a first party SNT because it is Bill's money. Once the SNT has been signed and funded, Bill can apply for reinstatement of his public benefits and have the funds in the SNT to supplement his public benefits.

On the other hand, if either parent had prepared a third party SNT for Bill before their death, Bill's one-third inheritance would have passed into his SNT seamlessly without the loss of a day of benefits. It's a beautiful thing!! A Third party SNT can be revocable or irrevocable.

Choosing Trustees
The choice of trustees is critical. The trustee must be trustworthy and someone who will responsibly follow the grantor's instructions set forth in the trust. The trustee can be a person or a trust department of a financial institution.

The trust is like a roadmap that the trustee uses to follow the grantor's directions as to how to manage and payout the grantor's money upon the grantor's death or mental incapacity. When I draft a trust I only have two limitations: the grantor's goals must be 1.) Legal; and, 2.) Sufficiently clear so the trustee knows what the grantor intended.

Trusts really are a flexible and amazing tool in Estate Planning.



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