How a Trust really works … a simple example

How a trust really works. A Trust operates simply, distributes assets without probate, and the ability to distribute assets over time is broad and flexible.

Let’s discover a simple example of how a trust really works.

Suppose Ward and June sign (“settle”) a Living Trust.

They title their major assets into the Trust. Their lives proceed as usual, and they have continual access to the assets in their Trust.

If Disability Arises.

Suppose further that later in life, Ward begins suffering from dementia. The Trust remains there for them. Ward and June are Co-Trustees of their Trust. So, June can still access the assets of the Trust. They can use those assets for regular life expenses. AND they can use those assets for any special care that Ward may require. 

Death of the First Settlor.

Now, Ward passes away, and June becomes a surviving spouse. In the Trust, Ward signed a Personal Property Statement. Through this statement, Ward leaves some of his personal property and sentimental value items. June remains a Trustee of the Trust. She can simply and easily hand out these items to herself, to children, nieces, nephews and friends. Without any court or attorney involvement, supervision or probate procedure, June can distribute those things. She does so per Ward’s wishes (as contractually mandated in the Trust).

During the remainder of June’s life, the Trust assets are still available for her everyday life,. And yes, they are available also for any special care that she may require. (Most couples do elect, however, that the Trust terms are “locked-in” and no longer subject to change or revocation once the first settlor has passed away.)

Years later, June (the surviving spouse or second Settlor) passes away.

Again, when June passes away, the successor Trustee distributes June’s personal property according to her personal property statement. (The Successor Trustee is someone Ward and June named to administer the Trust, according to its provisions, once they are no longer able.)

At this point, the ultimate distribution terms of the Trust become active. The Successor Trustee can distribute the major assets from the Trust Again, he or she does so as mandated by the terms of the Trust — to those to whom Ward and June chose to leave their legacy. Again, without probate and without court supervision, the Successor Trustee can distribute Ward and June’s home and major assets to their loved ones and friends. That Trustee delivers personal property, writes checks, assigns funds and deeds real estate. It is a fairly simple matter.

Not to complicate the explanation, but if Ward and June included such directions in their Trust, assets can either be distributed right away. Notably they could also provide that certain people receive their distribution at age 25 or 30 . Or maybe it is administered to assist with post-high school training or education. 

This ability to administer assets for a time, pursuant to a schedule or triggering events is another way that a Trust differs from a Will.

A Trust operates simply, assets are distributed without probate, and the ability to administer and distribute assets over time without court involvement is broad and flexible.

Why is a Durable Power of Attorney so vital?

Why is a durable power of attorney so vital? I push them and say how important they are, but why? Hopefully convenience, but they may save you a lot.

Basics… what does it do:

  • allows you to delegate powers, so that someone can act on your behalf;
  • the person acting on your behalf can not act against your competent wishes; and
  • the powers all expire automatically upon your death (so, do not make the common mistake of believing that this person has authority to pay final expenses, funeral arrangements after death, and so on)

Details

Two roles in the document:

  • principal (this is the person signing the document) and
  • “attorney in fact” (the person to whom the powers are delegated)

What can they do on your behalf

Banking, taxes, insurance, pay bills, write checks, contract for utilities or medical care, lease, mortgage, buy, sell, mail, prosecute or settle lawsuits, make claims, receive review and act on personal medical information … the list goes on and on

Things they can't do on your behalf:

Make, publish, declare, amend or revoke my Will;  Make, execute, modify or revoke a Living Will or "do not resuscitate" order or directive;  Require me to take any action against my free will;  Require me to refrain from taking any action against my free will; or  Carry out any action I have specifically forbidden while not under disability or incapacity.

When can they act:

when you are present, or when you're absent, out of country, across the street, unconscious, asleep, comatose

When is it really important?

If your own competency fades; without it you need to go to court to be appointed as guardian (to be able to care for person) and Conservator (to handle business, finance, assets), even to act on behalf of your own family or spouse

Why is a durable power of attorney so vital? I push them and say how important they are, but why? Hopefully convenience, but they may save you a lot.

Your Estate Plan is not just a plan for when you pass away

Your Estate Plan is not just a plan for when you pass away. A Trust and a Durable Power of Attorney work together during your lifetime.

Do not make the mistake of thinking that not having an estate plan only matters when you die.

Let’s talk about how your estate plan takes care of you during your life.

When you begin and fund your major assets into a Trust, that Trust is going to provide for you during life in a number of ways; let’s use an example of “Ron and Dorothy”:

  1. Ron and Dorothy can use any assets of their trust, sell, trade or lease out assets in their Trust during life;
  2. Suppose either Ron or Dorothy reach a point where their capacity is somewhat or extremely diminished; the other can continue to act as Trustee of Trust and even add one of their children as Co-Trustee if they like, and of course, the Trust assets can be used for regular life things for the well spouse and for the spouse who now has a diminished capacity … and importantly this is nearly seamless … neither needs any court or legal action to be able to access Trust assets and care for their spouse;
  3. Suppose Ron passes away; just as before, the Trust assets remain available for Dorothy’s life, care and support whether she was the one with diminished capacity or not; if she’s fine, she manages assets of the Trust, and if not, one or more of her children become Co-Trustees to handle those things; either way, the Trust assets are available for the survivor for their life

How about the Durable Power of Attorney.

Let’s stay with Ron and Dorothy. They were smart and signed powers of attorney, naming one another to be able to act on their behalf, so long as they are alive, for healthcare and financial/property matters.

If we suppose that one of them begins to suffer from dementia, and needs assistance. They are ahead of the problem. Rather than one of them seeking appointment by the Court to act for the other as Guardian (for health and person) and Conservator (for property and financial matters), they are already empowered to act under the Durable Power of Attorney. By the way, it is called “durable” because it remains effective during periods of absence or incapacity of the principal (the one who signed the document naming the other). 

With the Durable Power of Attorney, the well spouse can take care of a great variety of things on behalf of their spouse:

  • Banking, taxes, insurance;
  • Legal matters, claims and settlements;
  • purchase/sale/lease of real estate and vehicles;
  • Financial management and speaking/acting on his/her behalf with representatives;
  • Acting/speaking for the other with respect to medical visits, information and decisions; and even
  • Small things like subscriptions, library books and utilities.

And, that is by no means an exhaustive list … those are only common examples.

So, do not go on believing that estate planning is only for when you pass away. It is important long before that for a number of reasons. Moreover, if you get to a point during life that you no longer have capacity, it can be too late to sign an estate plan, and your spouse and family may need to go through the expense, process and time of going to court to get you a Guardian and Conservator appointed. While it may seem less than logical, your spouse (without a Power of Attorney or court appointment) does not have some automatic authority to act on your behalf.

Your Estate Plan is not just a plan for when you pass away. A Trust and a Durable Power of Attorney work together during your lifetime.

Pourover Wills explained

What is a Pourover Will? It is a precautionary Will used to fund assets into your Trust, in case you forget to do so during your life.

Maybe you have heard of a Pourover Will, but do not really know what that means. I have written before about four critical documents in an Estate Plan. There are more pieces, but four seem central.

1. A Trust does a lot of things. It holds assets in a place that you have access during your life. Your Successor Trustee(s) can also access such for your behalf, if you become later in need of assistance. And ultimately, your Trust distributes assets, usually after your death, according to your directions.

2. A Durable Power of Attorney is a way for you to delegate authority for someone to act on your behalf, but not against your competent wishes.

3. A Living Will, if you like, allows you to memorialize your intent. In essence, it says that if you become in a condition that your quality of life may not be restored, and you would be maintained by machines, you would rather not have your life extended in that condition.

4. A Pourover Will is a precautionary document, as described in more detail below.

A Trust controls (and ultimately distributes) only those assets which it owns.

In this way a Trust is fundamentally different that a Will. With a Will, one does not change title to assets during their life. Rather, the probate process is required to move the assets (through inventory, administration and claims) to the beneficiaries.

Again, a Trust controls only those assets it owns. On occasion, people neglect to put a significant asset into their Trust before dying. This is where the Pourover Will steps forward. This type of Will is a precaution, so that if assets were left out of the Trust, this Will can be employed to move the assets into the Trust, so they can be controlled according to the wishes of the decedent.

A Pourover Will goes hand in hand with a Trust.

While one may not intend to leave significant assets out of their Trust, it can happen. If something is first overlooked, the Pourover Will can help.

What is a Pourover Will? It is a precautionary Will used to fund assets into your Trust, in case you forget to do so during your life.

Guardians and Conservators: their selection can be crucial

Guardians and Conservators: their selection can be crucial. Minor children who lose their parents, and adults who need help both may be dependent.

It’s not really a very well-known topic but a guardian and conservator are important in a couple situations where people need someone else to care for them.

Children

First is a minor child. In the absence of a parent, and while a child is young, they don’t have legal capacity … they cannot go contract with a dentist for services, they can’t consent to their own field trip at school, they can’t buy insurance … all sorts of things that they can’t sign, as a child. That child needs a guardian and conservator

Adults with impairment

Another group of people are adults with an impairment who cannot handle their own affairs. Sometimes that can be due to a life-long condition or it can be someone who starts losing capacity, losing their memory, suffers from dementia or Alzheimer’s later in life. They may need someone to help handle their affairs. So you have heard the term guardian and you have heard of a conservator. What are those two things?

It is a pretty common sense division of duties. A Guardian is someone who cares for your person or your health, all sorts of care decisions. A Conservator cares for your finances and your property. So it is a pretty obvious division there. As a parent of the child, you would do both of these things, but if they’re different people (the Guardian and the Conservator), the duties may be divided among them.

State Law

Kansas law gives you the right to nominate Your Guardian conservator for your children in your will or your trust. You can make nominations, so that if something happens to you and your spouse, for instance, and your child or children were still minors,  you will have nominated guardian and conservator for your children.

And under Kansas statute, as long as the court finds that the child is in need of a guardian conservator, the statute says the court SHALL appoint your nominee(s). So your your nominee in your estate plan has great weight, as it should.

Guardians and Conservators may help an “adult with an impairment.” That could be someone has a condition their entire life such that maybe they need some help with their affairs. It can also be someone who has capacity, but a little later in life maybe they begin slipping. So, while they are competent, they can nominate someone as guardian and/or conservator in their power of attorney document, and the court is to – by law – prioritize that person as a guardian conservator for the adult with the need.

That’s a little circular because you hopefully should not need the appointment of a guardian conservator when you have a good Durable Power of Attorney document in place. But that’s kind of a safe backup. I often, in a power attorney document, name a nominee as a guardian and conservator, and that power of attorney document should take care of things.

Example – how does it work?

So, let’s say I sign a power of attorney document and I name Bob to be what is called my “attorney in fact” (a person who has delegated powers in my power of attorney). If that’s thorough and covers business and healthcare decisions, the durable power of attorney document itself should carry the day. Just by signing that (while I have full capacity) with the various and  broad enumerated powers, I pretty much take care of things. There should not be a situation where I need a power attorney later in life.

So, those are some ins and outs for minors or adults needing a guardian and conservator. I hope this clears things up for you. It can be a bit complex, but it should work out for you.

For instance, in a Trust you might name a nominee as the guardian and conservator for your child(ren) in case something would happen to you (and your spouse) at a young age. Then your trust is also going to provide funds for your children. So the nomination and the assets of the Trust kind of work hand-in-hand: there will be someone in your trust who can provide funds and someone (perhaps the same person, perhaps not) in the person of a guardian and conservator who can care for the child(ren), sign that field trip consent, who can take the child to the dentist and represent legitimately that they can speak for this minor child.

Guardians and Conservators: their selection can be crucial. Minor children who lose their parents, and adults who need help both may be dependent.