A trust is most easily thought of as a set of rules. Notably, a trust is not a person or an entity like an LLC or corporation. When reading about trusts, it is easiest to replace “trust” with “rulebook.”
Because rulebooks cannot own property, trusts cannot own property. The trustee of a rulebook/trust is the manager of assets that have been made subject to the rules of that rulebook/trust. There can be more than one trustee, and there can be rules as to the succession of trustees based upon certain circumstances, which circumstances would be identified in the rulebook/trust.
The owner of the assets subject to the rules in a rulebook/trust is called the beneficiary. And, rulebooks/trusts can have multiple beneficiaries at the same time or successor beneficiaries, based upon the rulebook’s/trust’s rules.
For most rulebooks/trusts, there is no rule that requires that the trustee and the beneficiary be different people.
For example, I may create a legally binding, two-rule trust. As no surprise to those who know me, the first rule would be that nothing in my trust could be used in the state of Michigan. The second rule would be that everything I own would be distributed to my brother when I die.
I could name myself as trustee until I die. And, I would be the beneficiary until I die. As beneficiary, I could do anything with my truck that I wanted, as long as such use was consistent with the rules of the trust, rules that I, myself, selected.
Upon my death, one or more new trustees could take my place, and my brother would be the successor beneficiary of the trust.
Typically, the rules of a rulebook/trust can be changed. Rulebooks/trusts that can be changed are called “revocable trusts.”
If a rulebook/trust prohibits changes to its own rules, the rulebook is called an “irrevocable trust.”
A revocable trust that can only be changed by only one person will obviously become irrevocable when that person dies unless the trust rules grant to someone else the power to change the rules after the initial person dies.
An effective rulebook/trust will include checks and balances that direct a trustee’s actions with oversight from beneficiaries, even if beneficiaries and trustees are literally the same person or people. Because of the legal oversight due to different roles held by (potentially different) people, rulebooks/trusts are an effective method of facilitating the transfers of assets to someone else without going through probate when the initial owner of those assets dies.
Avoiding probate includes avoiding the time, expense and public nature of disclosures that are a part of the probate process, which is administered through the local probate court.
Certain rulebooks/trusts have also been very valuable in maximizing estate tax savings for married couples. With Ohio’s elimination of the estate tax and the federal government’s increase of the threshold after which tax would have to be paid (now $11,000,000 per person), the need to use rulebooks/trusts to save on estate taxes has decreased significantly in our area.
Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at Lee@LeeSchroeder.com or at 419-659-2058. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.