Vincent F. Gauci - VFG Associates,LLC

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    29432 Joy Road, Livonia, MI 48150

  • Estate Planning

    How does a trust work?

     

    The following is a very simplified explanation of a revocable grantor trust. Many clients have stated that they do not understand how a trust works or what it is all about, therefore, an extremely simplified explanation has been listed below.

    A revocable living trust is a written expression of an individual’s desires as to the management of his or her assets during his or her lifetime and it lets an individual direct how his or her property will pass after death. A revocable living trust allows an individual (the settlor ) to select another individual (the trustee) to distribute settlor’s assets after death. Generally, the settlor (creator) of a trust is the initial trustee, but anyone can be chosen to be the initial trustee. Once the initial trustee no longer desires to be a trustee or if the initial trustee becomes incapacitated or passes away, the successor trustee takes over to manage the trust assets. The successor trustee is able to take over immediately. The successor trustee usually uses the death certificate of the initial trustee to prove that he or she is now allowed to act as trustee.

    Once a trust agreement has been written, it must be “funded”. This means that the settlor must change the title of his or her assets to the trust rather than leaving them in the individual’s name personally. (For example, the owner of real estate should be John Doe Living Trust dated 01-01-00 rather than just “John Doe”.) A good way to think about a trust is as a holding box. All of the items you own are put into the box and on the side of the box you have listed who can manage the assets in the box and also, who is entitled to the items in the box once you have passed away. The only way someone would know that the items belong in the box is if the title of an asset has the box’s (trust’s) name on it.

    When an individual has a revocable living trust, a separate tax identification number (social security number) is not used. The settlor’s own social security number is used for any assets owned by the trust and any income is reported on the settlor’s personal income tax returns. Once the settlor of a trust passes away, the successor trustee then requests a tax identification number from the IRS (if there are two settlors, a husband and a wife, a tax identification number does not need to be requested until the last spouse passes away). A simple form is filled out to receive this number. The trustee then files a tax return for the trust for each year that it is in existence. Generally, property is distributed from the trust to the beneficiaries soon after the settlor passes away and the trustee only files one tax return. The purpose for filing the tax return is that if the trust assets earn income (example: stock goes up in value after the date of the settlor’s death but before it is distributed to the beneficiaries) the IRS needs someone or something to tax and if an individual has passed away then he or she cannot be taxed.

    A revocable living trust may be changed or completely revoked by the settlor at any time. Only upon the incapacitation or death of the settlor does the trust become irrevocable. Once the settlor passes away, the successor trustee must then distribute the assets exactly as the trust states. The successor trustee does not need permission from the probate court to make distributions. Therefore, on the death of the settlor, the successor trustee can take over immediately and distribute all property which has the trust’s name on it. (Note: the successor trustee should be sure that all settlor’s creditors have been paid.) Once all of the property from the trust is distributed the trust ends.

    Also included with your trust document are a durable power of attorney for healthcare (document in which you choose someone to make your healthcare decisions for you if you are incapacitated), a durable power of attorney for financial matters (document in which you choose someone to take over your financial matters if you are incapacitated) and a pour-over will (a will which would only be used if upon your death you owned any type of property in your own name alone and did not have the trust as owner or a beneficiary listed).


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