When people say they want a Trust put together, they are usually saying that they want a document that will say who will get what when they die. People who want to avoid probate will often want a Trust. But, what exactly goes into a Trust and what do you need to think about before putting one together?
A good understandable Trust will read sort of like an instruction manual. It will be broken up into sections that deal with different types of situations. For purposes of this conversation, let’s say that Steve and Chloe are married and have 2 kids, Samantha and Emily. The Trust starts out saying that while Steve and Chloe are alive, they can do whatever they want with their assets. They can sell their house, spend all of their money, make stupid investments, etc.
Usually the second section then says what will happen to Steve and Chloe’s assets when Steve or Chloe dies. This section is usually worded one of two ways. If this is Steve and Chloe’s first marriage, they typically will say everything that Steve had will be Chloe’s and everything Chloe had will be Steve’s. If it is a second marriage for both Steve and Chloe, and Samantha is Steve’s daughter and Emily is Chloe’s daughter, the Trust might say that if Steve dies first, 75% of his assets will go to Chloe and 25% will go to Samantha. Chloe might say that if she dies first, all of her assets will go to Emily. This part of the trust can be worded however Steve and Chloe want. Another factor is if there is a prenup, it will often include sections about what happens when one of the spouses dies.
Usually the third section of the trust lays out what happens when Steve and Chloe are both deceased. If Samantha and Emily are both Steve and Chloe’s kids, then typically everything will be split equally between the 2 of them. There are, though, many variations of this. If one of the girls has special needs, the amount left to her may be greater or smaller than the amount left to her sister. If there is a big age difference between the girls and Samantha is done with college and Emily is in high school, the assets may be weighted in favor of Emily to allow her to finish growing up and getting through college.
If Samantha and Emily are not both Steve and Chloe’s kids, then a lot depends on the blended family dynamic on how money will be left to Samantha and Emily. If Steve and Chloe have about the same amount of assets, then maybe they would split everything between the girls. If Steve came into the marriage with fewer assets than Chloe, then Chloe may want her daughter to receive more of an inheritance than Steve’s daughter.
Once it is decided how the assets will be divided, the next question the Trust addresses is how old should the girls be before getting their inheritances outright, i.e. no strings attached. This is very much a matter of personal preference. Let’s say everything will be split between Samantha and Emily. Each girl will get her inheritance at age 25. Let’s say Steve and Chloe die and Samantha is 17 and Emily is 15. Until Samantha turns 25, her inheritance can be used for her education, health and best interest. A trustee, i.e. boss of the Trust, will manage the assets. When Samantha turns 25, whatever is left in her inheritance will be given to her. The same would apply for Emily. Money can be distributed in one lump sum like above. It can be distributed in increments, like 1/3 at 25, ½ at 30 and the rest at 35. This is a matter of personal preference as well.
Last, the Trust lays out who will be the trustee—i.e. the person in charge of the assets. Steve and Chloe are the initial trustees. If one of them dies first, typically the other continues as the sole trustee. Then, Steve and Chloe will name who is next if they both can’t be trustees anymore due to incapacity or death. The most important characteristics for a trustee are: honest as the day is long; very organized; not easily rattled; and last, reasonably good with money. The trustee does not need to be a financial genius.