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Passare and Robert L. Shepard Professional Law Corporation

Forming a Trust
eBook #7

End of Life Management eBook #7:

Forming a Trust 101

Does the word estate conjure up images of a magnificent property with a tennis
court, manicured lawns, and a swimming pool? Many people make the mistake of believing
that unless they own property like Rockefeller, they dont need to plan their estate.
While the government dictates what happens to your estate, a compelling question
remains: do you want to be the one to determine how your estate and its assets will be
distributed? A common element of a basic estate plan includes a trust agreement. If
you own real estate, or your beneficiaries are minors, then a trust is an important tool
to consider.
Passare.com

TM

and Robert Shepard Professional Law Corporation have teamed up to

provide you with an introduction to trusts and to answer your questions. Our goal is to
help you learn about trusts and to help you determine what level of planning and trust is
best for your stage of life.

You Will Learn:

1. What is a Trust
2. What is the Purpose of a Trust
3. Types of Trusts
4. Comparison of Trust Types
5. How Trusts Work
6. Summary of Trust Benefits

The eBook includes:

A. Forming a Trust Checklist
B. Example of Trust
C. Trust Glossary of Terms

Estimated Time Required:

15 to 30 minutes

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1. What is a Trust?
A trust agreement is simply your written instructions directing someone (the trustee)
on how to manage your property (the corpus) for the benefit of your heirs (the beneficiaries).
The four components to a trust are the:
(1) Settlor, the person who creates the trust
(2) Trustee, the manager of the trust
(3) Beneficiary, the entities or individuals receiving benefits from the trust
(4) Corpus, the trust property/assets

TIP: Each of these four components is necessary to create a valid trust. For
example, a trust without a corpus may not be valid. Therefore, most trusts
are funded with a dollar amount at the time they are created, even if the
amount is only $1.00.

A trust is often an integral component of an estate plan. Determining the type of

trust that is best suited for your specific estate plan should be based on considerations
relating to your particular goals and objectives. We recommend that you consult an
estate planning attorney in your area to help with your specific details; Here we present
some general background information.

2. What is the Purpose of a Trust?

A trust commonly solves two issues that arise in estate planning: avoiding probate
and leaving assets to minors. Probate is the court-supervised process by which title to
assets are transferred. In simple terms, Most people want to avoid probate because:
It is expensive. Approximately 4% of the settlement goes to an attorney and
1% to court costs.
It is time consuming. It typically takes a year or more to complete probate
even with full cooperation from all parties.
Funded vs. unfunded
There is a public record of everything that occurs pertaining to the matter.
If any of your beneficiaries are minors, any inheritance they receive must be supervised
by a court-appointed guardian, which typically requires lawyers and court appearances.
Further, the beneficiary will receive any funds when they legally become an adult.

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With a trust, it is easier for the trustee to manage these assets for the benefit of the
beneficiary (or beneficiaries) without court supervision. The trustee can designate the age at
which a beneficiary may receive the funds, to ensure wise and thoughtful allocation of funds.

Now, take a few minutes to answer these questions:

1. Are any of your beneficiaries minors?
2. If your beneficiaries are minors, how do you feel about a
court-appointed guardian?
3. For your situation, how would a trust benefit your end-of-life plans?

3. Types of Trusts
Trusts can be categorized in several different ways:

Living versus testamentary

Revocable versus irrevocable

Funded versus unfunded

Self-trusteed versus third-party trusteed

4. Comparing Trust Types

Living versus Testamentary Trusts
Trusts may be created by a person either during their life, or after their death through
provisions indicated in the persons will.

Living Trust

It can be created by a person during his or her lifetime

It may be used to implement estate tax planning

techniques that shelter assets from the federal estate
tax with a credit shelter trust

Testamentary Trust

It can be created after death through provisions in a

decedents last will and testament

It may be used to implement estate tax planning

techniques that shelter assets from the federal estate

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tax with a credit shelter trust

Revocable versus Irrevocable Trusts

Revocable Trust

It can be modified or even completely revoked by

the person creating the document.

It is a flexible tool for estate planning because the

settlor can change the terms of the revocable trust
to meet the needs of the evolving family.

A common advantage is that the assets in the trust

avoid probate, while the settlor retains control over
the property.

Irrevocable Trust

It cannot be changed after it is created.

Since it cannot be changed, it is critical that the

language of the trust does what you want it to do
before it is signed and funded.

Normally, the creation and funding of an irrevocable

trust is a taxable event.

Irrevocable trusts are used to remove assets from

a settlors estate through transfers of insurance or
other property for the beneficiaries, who are usually
younger generation family members.

In some circumstances, an irrevocable trust may

also be used to insulate assets from creditor liability.

TIP: Every revocable trust becomes irrevocable upon the death of the settlor.

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Funded versus Unfunded Trusts

Trusts can also be characterized as either funded or unfunded:

Funded Trust

A funded trust has assets beyond than the nominal

$1.00 titled in the name of the trust.

Revocable trusts can be funded with assets any

time. There are varying reasons to fund a trust during
life, rather than waiting to fund the trust through
provisions in your will.

For example, an individual may fund a trust if

they want the trustee to manage the assets placed
into the trust.

Unfunded Trust

Self-trusteed trusts are funded if the settlor (who is

also the trustee) wants to avoid the probate process
to transfer those assets at the death of the settlor

An unfunded trust is a trust with some nominal

property typically $1.00 as its assets; since some
type sort of corpus is typically required to have a
valid trust.

Unfunded trusts become funded when a decedent

dies and the property passes to the trust through
the will.

The property that is ultimately transferred into the

trust must first pass through the probate process
to get into the trust.

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Self-Trusteed versus Third-Party Trusteed Trusts

Self-Trusteed Trust

A self-trusteed trust is a trust with the settlor also

serving as the initial trustee

This permits a person to create a trust and fund it

with assets, while not having to give up control over
those assets.

A self-trusteed trust document typically provides

that upon the death, resignation, or incapacity of
the settlor and/or initial trustee, a successor
trustee takes over

Third-Party Trusteed
Trust

Self-trusteed trusts are funded if the settlor (who is

also the trustee) wants to avoid the probate process
to transfer those assets at the death of the settlor
A third-party trusteed trust is a one that is created
with someone other than the settlor, such as another
individual, or, a corporate entity, such as a bank
trust department, as the trustee.
This independent, third-party trustee is charged
with the fiduciary responsibility of managing the
trust for the benefit of the beneficiaries.

Now, take a few minutes to answer these questions:

1. What are the differences between a revocable trust and an
irrevocable trust? Which would be the most appropriate trust
for your situation?
2. What are the differences between a self-trusteed trust and a
third-party trusteed trust? Which would be the most appropriate
trusts for your situation?

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5. How Trusts Work

Different types of trusts work in different ways and each have different goals, but in
all cases, trusts are governed by the directions set forth in the trust agreement. As the
settlor (creator) of the trust, you provide the rules that the trustee will follow. Typically,
the settlor creates the trust by signing a valid trust agreement, and then adding minimal
amount of assets into the trust corpus.

Trust Funding Options

If the trust remains unfunded, other than the minimal assets to make it valid, then the
trust is considered inactive because there are no assets to manage. If the settlor, or
someone else, adds assets to the trust by retitling assets into the name of the trust, or
by making distributions to the trust from retirement accounts, a probate estate, or
other source, then the trustee named in the document must manage those assets.
The trustee can be the settlor, a family member, some other trusted individual, a
professional bank or trust company, or a combination of these. The trust document will
provide instructions on how the trustee should manage those assets, including when the
trustee should pay out income and/or principal to the trust beneficiaries. The trust
document will provide instructions on how the trustee should manage those assets,
including when the trustee should pay out income and/or principal to the trust beneficiaries.

Trustee Powers
The trust document may also set forth the powers of the trustee to handle specific
tasks, such as providing accountings of trust activities to the trust beneficiaries, paying
taxes, and managing special assets or restrictions placed on certain beneficiaries. The
document will also direct what happens if the serving trustee resigns or can no longer
serve in that role, by naming a successor trustee or a method for naming someone else
to take over that role.
The trust will continue until the trustee distributes all of the trust assets and terminates
the trust, based on instructions provided in the trust document.

NOTE: Remember, assets managed by the trust are not owned by the settlor; they
are owned by the trust. As a result, when the settlor passes away, the trust assets
do not need to be transferred through a probate process; the trust will direct what
happens, if anything, at that time.

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Now, take a few minutes to answer these questions.

1. Who would be best for the role of trustee for your trust: the
settlor, a family member, some other trusted individual, a professional
bank or trust company, or a combination of these?
2. What trustee powers would likely be most appropriate for your
situation?

6. Summary of Trust Benefits

A trust agreement is a document that contains instructions to direct the trustee on how
to manage property for the benefit of the designated beneficiaries.
Trusts can be categorized in several different ways, including:

living versus testamentary,

revocable versus irrevocable,

funded versus unfunded, and

self-trusteed versus third-party trusteed trusts.

Trusts can be an excellent way to control the distribution of your assets in a private and
efficient manner.

The information contained in this booklet is for educational purposes only and
is not intended to be construed as legal advice. For legal advice, consult an attorney.
The information contained in this booklet is subject to change and does not
purport to be a complete statement of all relevant issues. In certain jurisdictions this
may constitute attorney advertising.

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End-of-Life Management eBook #7

Establishing Trusts
Here is a checklist of tasks you will need to complete when establishing
a trust.

Where to start.
Review the various types of trusts to determine which trust
is appropriate for you.
Consult with a lawyer as needed for specific trust advice
and counsel.
Take inventory of your assets and then itemize what you
are going to leave in the trust.

Make decisions about who will inherit your trust property.

Family
Friends
Colleagues
Charities
Alternate beneficiaries

Choose someone to be designated as your successor trustee

to distribute property to beneficiaries.
I have chosen a successor trustee
I have chosen a alternate successor trustee.

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Discuss the responsibilities of being a trustee with the

person you choose, to ensure that he or she is willing to
assume this responsibility.
I have discussed the responsibilities with the successor
trustee.

Choose someone to manage property for all children under

the age of 18.
I have chosen a person to manage property for all children
under the age of 18.

Consult with an attorney for help to prepare the trust.

I have consulted with an attorney for help to prepare
the trust.

Final Steps.
Prepare the trust document.
Sign the trust document.
Your spouse signs the trust document.
Notarize the trust document.
Transfer title of property and/or assets to yourself as trustee.
Store your trust document safely.Provide your trustee
with a copy and then provide a copy to your lawyer, if
applicable.
Provide instructions to access the trust document for
the appropriate people.

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10

LIVING TRUST
REVO CABLE TRUST

e
l
p
m

I, the undersigned,
, do hereby confer and bestow
upon
(Hereinafter Trustee), the property as listed
and set forth in Schedule A attached. Said Trustee does hereby make and
execute this Declaration of Trust and hereby concurs and agrees on behalf
of itself and its successors and assigns, to hold said property in trust to
the following ends:

a
x
E

I. The property shall be held, managed, invested and reinvested by the

Trustee, and its successor or successors, with al the powers to the Trustee as
herein provided.
II. The Trustee shall divide the Trust Property into equal shares for each
of the named beneficiaries: and shall pay to, or apply for the benefit of, said
named beneficiaries such amount, or amounts, of the net income and/or
principal from each of said shares as the Trustee in its to, principal of said
share at the end of the year.
IV. In extension and not in limitation of the powers given them by law
or other provisions of this instrument, the Trustee and any successor or
successors shal have the ful power with respect to any property in any
Trust established hereunder, to deal with the same as if it were the owner
thereof without order or license of any Court.

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11

The interest of each beneficiary in the income and principal of a trust

under this instrument shall be free from the control or interference of any
creditor of the beneficiary or any spouse of a married beneficiary and shall
not be subject to attachment or susceptible to anticipation or alienation.
VI. This Declaration of Trust is revocable and the Settlor retains the
power to alter, amend or revoke this instrument either in whole or in part at
any time. Revocation shall be accomplished by a certificate of the Settlor
delivered to the Trustee personally or by certified mail.

a
x
E

IN WITNESS WHERE OF
Settlors, and
and seal this

day of

e
l
p
m
and

, Trustee, have hereunto set their hands

(month),

(year), A.D.

In presence of:
Settlor

Settlor

Trustee

Witness

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12

Glossar y o f Ter ms
Trust:

A trust is a set of written directions established by its

creator, called the settlor. A valid trust must include
trust provisions, a trustee, a beneficiary, and assets
transferred to the trust. A trust also consists of specific
directions written by its creator instructing the trustee
how to hold property for the benefit of
a beneficiary.

Settlor:

The person who creates the trust, also known as grant-

Trustee:

Trustee: This is the person who manages the trust. The

or, trustor or maker.

primary trustee is the initial manager. A successor trustee

can be named after the initial manager resigns, or is
incapacitated or deceased.

Beneficiary:

The entity or individual(s) who will receive benefits from

Corpus:

The trust property and/or assets

Irrevocable Trust:

A trust whose terms cannot be changed or terminated

the trust

at the request of the creator during his or her lifetime.

Once created, it remains in force based on the terms
set forth in the trust agreement. There are several types
of irrevocable trusts. Most are created with tax-savings
motivations.

Revocable Trust:

A trust that can be modified or even completely revoked

by the person who created the trust. It is a flexible tool
for estate planning because it allows for terms to be
changed as needed.
Court-supervised process by which title to assets are

Probate:

transferred to beneficiaries.

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13

Living Trust:

A trust that is created during a persons lifetime

Testamentary Trust:

A trust that is created after death through provisions

Special Needs Trust:

A type of irrevocable trust created by, or on behalf

in a decedents last will and testament.

of, a disabled individual in order to provide them

with supplemental support, without disqualifying them
from receiving government benefits. A Special Needs
trust has specific requirements, including payback/
reimbursement to the appropriate government agencies.
Compare this trust to a third-party, Supplemental
Needs Trust.

Funded Trust:

A trust that has assets titled in the name of the trust,

Unfunded Trust:

A trust with only the minimal asset of $1.00. Unfunded

trusts become funded when a decedent dies and the
property passes to the trust through the will.

Self-Trusteed Trust:

This is a trust where the settlor also serves as the

in addition to the minimal $1.00.

initial trustee. This permits a person to create a trust,

fund it with assets, and not give up control of the assets.

Third Party Trusteed

Trust:

This is a trust that is created with someone other than

the settlor. For example, a third party trust can be
created with another individual, bank, or corporation.
The independent third-party trustee manages the trust
for the benefit of the beneficiaries.

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14

From birth to death, life is a series of passages. Passare provides an online

service that connects people to trusted End-of-Life management experts and
resources. With Passare, you can explore, plan and prepare for end-of-life
management, simplifying the process while honoring ensuring the specific
needs and wishes of you and your family. Passare gives you control over
one of lifes most important passages. www.passare.com

Robert L. Shepards practice is focused on preventative law, basic estate planning,

designed to avoid probate; family limited partnerships designed to reduce estate taxes;
S Corporation formation to protect assets, and creating irrevocable trusts to protect
inheritors against creditors. He has helped over 1,000 clients protect their hard-earned
assets and ensures that these assets get passed on to the next generation. Having been
before every Federal District Court in California, the U. S. Tax Court, and many of the
states Superior Courts, he has never had a single: trust set aside, business agreement
held unenforceable, or entity disallowed by the Internal Revenue Service, or any court.
He also as a deep interest in transferring his breadth of knowledge in the classroom
as a law professor.