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Trust Terms: A Guide to How Trusts are Created and Distributed

June 27, 2024 • | Curran Estate & Elder Law, PLLC
Learn the steps and key terms for trust creation and administration from asset selection to drafting with an attorney to the trustee's financial and administrative obligations.

This guide defines the essential terms and the process of creating and distributing a trust, helping you plan confidently. It is advisable to work with an experienced estate planning professional to tailor a trust that meets your specific needs and help guide trustees through the intricate financial duties of managing the trust.

How is a Trust Created?

A trust is a legal document that outlines how your assets will be managed during your lifetime and after your death. The person who creates the trust is the grantor, also known as a settlor or trustor. This individual has the legal authority to transfer ownership of their property or assets into the trust. Upon the grantor's death, they are referred to as the decedent.

Step 1: Decide What Assets to Place in the Trust

The first step in establishing a trust involves deciding which assets you want to include. Assets are property or valuable items, both concrete and digital, that transfer ownership from the grantor to the trust. They can range from cash, real estate, stocks, bonds, and business interests.

Step 2: Identify Your Beneficiaries

Next, determine who will benefit from the trust, known as the beneficiaries. This could be family members, friends, or charitable organizations.  In Pennsylvania, it is important to ensure that any beneficiary named in a trust that will hold real estate is considered an "exempt beneficiary" according to the rules of the Pennsylvania Department of Revenue to avoid unexpectedly incurring realty transfer tax.

Step 3: Determine the Rules of Your Trust

The grantor also sets the trust rules for how assets should be distributed or given to the beneficiaries. Funds could be distributed outright upon the grantor's death, designated for health, maintenance, support and educational purposes, as a steady income, as a lump sum upon reaching a certain age, or a blend of any or all of these options.

Step 4: Select Your Trustee or Trust Manager

The trustee's job involves managing the trust's assets to a high level of responsibility and dedication, called fiduciary duties. The trustee ensures that all distributions to beneficiaries are made according to the trust rules, and fund management may last several years. The grantor can choose a trusted individual or a professional institution to serve as trustee.

Step 5: Drafting and Funding the Trust with an Estate Attorney

Create your trust by drafting a legal document with an estate planning attorney. Lastly, the grantor must fund the trust or transfer ownership of all assets, known as the principal, that the trust will manage. Assets must be placed in the trust for the trust to have legal authority over them.

How are Assets in a Trust Distributed to Beneficiaries?

Trust administration is the process of managing the assets, distributions and filings of trust tax returns. These tasks can often be complex and time-sensitive, making the professional guidance of an estate lawyer essential. The trustee is responsible for managing the trust's assets, ensuring that distributions are made in accordance with the trust document and fulfilling other fiduciary duties.

Step 1: Notification and Documentation

The trustee will gather all necessary documents, including the trust agreement and death certificate. They must notify all beneficiaries and related parties about the grantor's death and the start of the trust administration process.

Step 2: Trust Asset Management

The trustee assesses and manages the trust's assets. This may include liquidating assets, transferring titles and ensuring proper valuations. The trustee must also maintain detailed records of all transactions and decisions made.

Step 3: Financial Obligations

The trustee is responsible for settling the trust's debts and obligations, including paying taxes. Before distributing assets to beneficiaries, they must ensure that all financial responsibilities are met.

Step 4: Distribution of Assets

Once all financial obligations have been met, the trustee distributes the assets, which involves making a payment or giving property from the trust to the beneficiaries based on the trust terms. Depending on the specific stipulations of the trust, this could be in the form of lump sums, structured payouts, or ongoing distributions.

Step 5: Ongoing Trust Management

If the trust is designed to continue over time, the trustee must manage it according to its terms. This includes ongoing investment management, tax filings and distributions to beneficiaries as required.

Trust Terms Definitions

  • Beneficiary: Individuals or entities named by the grantor to inherit the assets in the trust.
  • Fiduciary: Someone obligated to manage assets in the best interest of another, such as a trustee for a beneficiary.
  • Funding: The act of transferring assets into the trust is essential for its effectiveness.
  • Grantor: The person who establishes a trust. They are also known as the settlor or trustor.
  • Distributions: Making payments or giving property from the trust to the beneficiaries as outlined in the trust's terms. Depending on the trust's rules, this can include periodic payouts, lump-sum disbursements, or specific allocations of property.
  • Principal: The original assets placed into the trust, excluding any earnings like interest or dividends.
  • Trust: A legal document that outlines how your assets should be managed during your lifetime and after your death.
  • Trustee: The organization or person tasked with managing the trust.

Understanding these terms and the steps to creating a trust can empower you to make informed decisions about your estate. Consult with an experienced estate planning lawyer to help you navigate these processes and establish a trust that aligns with your wishes and efficiently provides for your beneficiaries.

References: U.S. Bank "Trust Terms You Need to Know" and American Bar Association "Glossary of Estate Planning Terms: Estate Planning Information & FAQs"

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