LLOYD MARTIN PLC

Introduction

There are three primary ways by which assets titled in the name of a person, or owned by that person, pass to heirs and beneficiaries on his or her death.  First, they can pass through one’s last will and testament. Second they can pass automatically by operation of law as in the case of joint ownership with another (e.g., real property titled tenants by the entireties to a husband and wife). Third, they can pass by virtue of a survivor or beneficiary designation within the instruments which control the assets, as is common for bank
or brokerage accounts.

The terms "property" or "assets" encompass both tangible and intangible property, real estate and a category of property known as a “chose in action.” Examples of tangible property include objects, such as antiques, automobiles or tools.  Intangible property includes, for example, stocks, bonds and money. Real estate includes all forms of real property ownership, including buildings, condominium or cooperative interests, vacant land and even timeshare ownership.

A chose in action is a little more complicated. For the purpose of this discussion, a chose in action is a right to receive something of value, a right which has not yet come to fruition because its receipt is dependent upon the passage of a specific period of time or the occurrence of a certain event, neither of which has yet occurred. Once the triggering time has passed or event occurred, the person will then come into possession of the asset. An example of a "chose in action" asset is the right to recover an unpaid debt or to receive an as-yet unpaid settlement in a lawsuit.

A will does not control the distribution of all of a person’s assets. A will only controls property, regardless of its type, to which the decedent has legal title, or ownership, regardless of whether the decedent at death has physical possession of the property, so long as he or she is otherwise entitled to possession of the asset.

Property, regardless of its type, which is held in a trust does not pass on the death of a decedent in any one of the above three above ways. Assets which are held in a trust, even where one may have physical possession of the assets, are neither titled in the name of the individual decedent nor owned by the decedent; rather, those assets are owned by and titled in the name of the trust. Accordingly, when he or she dies, his/her last will and testament does not control distribution of trust assets. An exception, of course, is where the terms of trust agreement stipulate that the trust assets, or some portion of those assets, will be distributed to the decedent’s estate on his or her death, for the express purpose of distributing those assets in accordance with the distribution scheme contained in the last will and testament.

Persons who are entitled to possession or use of assets held in trust are merely trust beneficiaries, having only a beneficial interest in the assets. Beneficiaries are only entitled to some specified interest, such as a stream of income, from a trust, and do not own the trust assets, unless and until transferred from trust ownership to individual ownership. So, a trust instrument could provide future transfer of an asset to a beneficiary, or it could provide for future divesting of a beneficiary’s interest in or claim to any trust asset. In short, the disposition of trust assets, including their future beneficial use, is always controlled by the distribution scheme–by the terms–contained within the four corners of the trust instrument, or trust agreement.

In recent years revocable living trusts have become an increasingly popular tool in estate planning, often as a supplement to a will; occasionally as a nearly complete substitute for a will. A trust is a separate and distinct legal entity which can own, maintain and control assets separately from the Settlor who creates the trust. A trust can only act through a Trustee and even where the Trustee may also have been the Settlor, the trust is the legal entity which owns the assets which have been transferred to it. A trust offers a way for a Settlor to separate himself or herself from his or her assets, thereby allowing for easy and even automatic passing of assets to designated heirs and beneficiaries, either while the Settlor is still living or upon his or her death.  In both cases, the assets can pass to the heirs and beneficiaries without the intervention or oversight of a third party or a court probate proceeding.

Common Trust Usages

In Virginia, if you own real estate which is mortgaged, whether you realize it or not, you are already a principal participant in a living trust. The instrument by which you pledge the real property for repayment of your mortgage loan is a deed of trust in which you are the Trustor. As the Trustor, you convey your property, in trust, to a designated Trustee, who has the power to take possession of and sell your real estate in the event of default on the loan. You and your lender are the beneficiaries of the trust. 

You as beneficiary have control over and possession of the property, so loan as you do not default on the loan or breach any of the covenants in the deed of trust. The lender as beneficiary is entitled to receive repayment of your mortgage loan. The lender also has a very important inchoate right, the right to invoke the power of sale you have vested in the Trustee, in the event you default on your loan or breach any of the covenants of the deed of trust which give rise to the lender's right to invoke the power of sale and direct the trustee foreclose on the lien created by the deed of trust. 

When invoking the power of sale the lender formerly directs the Trustee to take legal possession of the property and sell the property a public auction. It is important to remember that this process is a "non-judicial foreclose," which means that the power of sale granted in the deed of trust permits the trustee as directed by the lender to sell the property without going to court.

Another form of trust, often used for asset protection purposes, is a land trust in which title to a particular parcel of real estate is placed in trust, in a title holding arrangement designed to put a firewall around the property, and further designed to protect the anonymity of the real parties in interest, the real owners, by keeping the real owners' names out of the public records. 

Other Common Forms of Trusts Include:

• A spendthrift trust, used to protect a beneficiary’s assets from his or her creditors, or from his or her own financial irresponsibility.
• A credit shelter or bypass trust, used to limit the size of a surviving spouse’s estate which would be subject to estate taxes and to take maximum advantage of estate tax exclusions (see Estate Tax Planning) for the first spouse to die.
• A special needs trust, designed to help a disabled person who might otherwise lose Social Security or Medicaid benefits if he or she receives an unexpected windfall, but still allows use of trust assets to supplement his or her needs without affecting those benefits.
• An irrevocable life insurance trust, often used to fund payment of estate taxes, which if properly established removes the life insurance benefit from the decedent’s estate for the purposes of calculating estate taxes due.

The use of trusts is only limited by one’s imagination. Trusts can even be used to provide for the care, housing and interment of a pet long after the death of the pet’s owner. If you own real estate in more than one state, your heirs could benefit from having a living trust for that real estate, in that your estate upon your death would not need to be submitted to probate in each state where your property is located. If you have a living trust, probate is unnecessary where the title to the real estate is held in the name of the trust. As mentioned earlier, trust property is not subject to either oversight or intervention of court probate proceedings.

How Does a Trust Operate?

There are always three parties involved in a trust: (i) the Settlor, also known as the Trustor or the Grantor, who creates the trust agreement; (ii) the Trustee, sometimes also called the Grantee, who holds title and sometimes possession of all or a portion of the corpus of the trust, and carries out the instructions in the trust agreement; and, (iii) the beneficiary, who receives or will receive the benefits from the assets held in trust.  Any given trust agreement may have multiple Settlors, Trustees and beneficiaries. A common
example of such multiples would be a living trust established by a couple, where each is a Settlor, each is also designated a Trustee, and each is a beneficiary of the trust.

A trust is created using a trust agreement, usually in writing. Although oral trust agreements may in general be enforceable, a written agreement is clearly preferable so there is no misunderstanding about who is responsible for what, about the powers and duties of the Trustee, and most important, so that it is clear how assets are managed, controlled and dispensed from the corpus of the trust. Certain matters related to usage of trusts which must be in writing.  In particular, real property must be conveyed with a written instrument, a deed, into the trust for it to be controlled by the terms of the trust agreement.

Agreements which are ambiguous can be difficult to enforce, leave too much to interpretation and thus, a clearly written, well thought-out trust agreement is essential for accomplishing the goals of the Trustor.