As a Louisiana estate planning, estate administration and elder law attorney, I am often asked about trusts. In planning for a young, irresponsible, or disabled child, it is often advisable to use a trust to hold that person’s assets until they are old enough or responsible enough to manage assets for themselves. In the case of a disabled child, this often means money will be held in a trust for their lifetime and then distributed to other heirs at their death. This also prevents the disabled child from being disqualified for government benefits to which they would otherwise be entitled. A trust is also often useful in planning for long-term care for an elderly spouse or parent. A trust can be used to hold their assets for management by someone else. It may also allow them to qualify for Medicaid or VA benefits. Another use of trusts is as a means to avoid or minimize estate taxes. A recent Louisiana case involving Saints owner Tom Benson and his family dramatized this. As you can see, a trust has many benefits, but just what is a trust and how does it work? For those following the Benson saga and others who are curious about whether a trust might benefit them, the following answers the basic questions about a trust.
A trust is a legal relationship between three people – the grantor of the trust (usually called the settlor in Louisiana), the trustee of the trust, and the beneficiary of the trust. The grantor is the person who makes the trust. The trustee is the one who manages the assets in the trust, and the beneficiary is the one who gets to enjoy the assets in the trust. In the Benson case, a daughter and two grandchildren expected to enjoy the eventual ownership of the New Orleans Saints and Pelicans that was held in a trust that Mr. Benson established for them as the beneficiaries..
To create a trust in Louisiana, the grantor simply signs a document where he gives money or other property to the trustee to hold and use for the benefit of the beneficiary at some later date. Giving money or property to the trustee is called funding the trust and a trust must contain an initial gift of money or property to the trustee to be valid. This trust document can become effective during the grantor’s lifetime or at his death. If it is created during lifetime, it is called an inter vivo trust, if at death a testamentary trust. In the Benson case, the inter vivo trust was to have been irrevocable.
A simple example of a trust would be for me to give you $100 and tell you that I wanted you to use it for the benefit of my daughter in paying for educational expenses. If you accept that responsibility then you become the trustee of the trust and you now have a fiduciary obligation to me (the grantor) and to my daughter (the beneficiary) to use that $100 for her educational expenses. If she comes and asks you for the $100 to buy the latest new fashion and you give it to her, you may have breached that duty because the instructions in the trust were to use it for education.
Of course, most trusts are not this simple. They usually contain numerous instructions about how the property held in trust can be used, when (if ever) it can be given to the beneficiary and what the rights and duties of the trustee are. The trust may call for more than one trustee and it might contain instructions about how many trustees are required to act with regard to specific actions. As long as it is not against public policy, it is usually possible for a trust to contain whatever instructions you choose to place on the trustee and the beneficiary. A typical provision might instruct the trustee to distribute property to a child when they graduate from college, but if they fail to graduate from college to hold that property until a later date. These instructions would attempt to provide an incentive for the child to attend college.
Many people have conceptual difficulty understanding how a trust operates, but it simply operates as a person would operate outside of a trust. Thus, the money given to the trustee can be used to open a bank account or investment account, buy stocks or bonds or other property or otherwise invest it. If real estate is transferred to the trustee, he can hold that real estate or sell it just as he could if there was no trust. However, the big difference is that as trustee he is acting as a fiduciary. A fiduciary has to put the interest of the beneficiaries first and do what is in their best interest. This, in the Benson case, the trustee has a duty to manage the trust assets and preserve value for the beneficiaries. That is probably why he has so far refused to let Mr. Benson exchange other property for the Saints and Pelicans sports teams that the trust now owns.
As you can see, when you take a trust apart it is not difficult to understand and it can be used by estate planning professionals to help you plan for your and your family’s future. If you think a trust might help in your estate planning, be sure to consult with professionals who regularly draft and help administer trusts. A poorly written or administered trust may not survive legal challenges and protect your loved ones as you intended.