A primer on trusts

Many people have heard of trusts. But not that many people actually know what trusts are and what benefits they can provide. Let’s try to change that.

What is a trust? In simple terms, a trust is a way to transfer your money, real estate, and other assets to one or more other people. It involves three types of people: the person transferring assets (the grantor), the person managing those assets (the trustee), and the person receiving the assets (the beneficiary).

What are the benefits of a trust? At least three.

First, trusts give you control over where your assets go and when your beneficiary can access them. You can retain access to the property through your lifetime, or not. You can instruct the trust to issue payments once your children reach a certain age or graduate from college. You can withhold trust funds if they do not graduate from college, or fail to do something else that you want them to do. The sky’s the limit on what kind of instruction you provide and which scenarios you address.

Second, trusts can protect your heirs from their spouses and creditors. Say, for example, that you transferred money directly to your child and later they got divorced. The ex-spouse would probably get a chunk of it. But if you had put the money in a trust, the ex-spouse would have no rights to any future payments issued by the trust. 

Or think about if your child found themselves behind on a business loan. The money you gave them would be fair game when the bank tries to collect on the debt. But if instead, you put the money in a trust and gave the trustee discretion about when to give the money to your child, the bank could not go after the trust money until the trust actually gave the money to the child. That delay gives the child plenty of leverage to negotiate with the bank because it wants to get paid now rather years later. 

Third, trusts offer a fast, private way to transfer your assets when you die. It’s fast because property in a trust does not need to go through the probate process. And it’s private for the same reason—probate is a matter of public record; trust documents are not.

Thus far we’ve discussed trusts as if they are all the same. But trusts come in several shapes and sizes much like businesses can decide between, say, being a partnership, corporation, or limited liability company. The varieties fall into two main categories: revocable and irrevocable.

Revocable trusts (often called “living trusts”) are flexible vehicles. A grantor can amend or end the trust at any time. They can appoint themselves as trustee and beneficiary during their lifetime. They can appoint someone else to manage some or all of the trust’s assets. And so on. In short, they can set up the trust, so that they can act as if they still own the assets in their personal name.

The downside is that because a grantor can freely alter a revocable trust, it offers minimal asset protection—that is, the trust will not shield your assets from the claims of your creditors. At most, the trust will delay how long it takes the creditors to access the trust funds because it requires your creditor to get a court order commanding the trust to distribute assets to your creditor.

Why do people bother with setting up a revocable trust then? To have someone else manage some or all of their property. To protect their assets if they become incompetent or incapacitated. To reduce the chance that an heir will fight over how the estate is distribute. To reduce the disruption to their business if they die or are disabled. And, of course, for the other benefits we previously touched on (privacy, avoiding probate, control beyond the grave, and asset protection for their heirs).

Irrevocable trusts, by contrast, are much different animals. The grantor cannot undo it once it starts. And, generally, the grantor is not the trustee. In other words, the grantor gives up ownership and control of their assets.

Sounds crazy, right. Why would someone voluntarily relinquish ownership and control of their assets? The answer: To reduce their taxes and liability.

Let’s begin with taxes. Transferring assets to an irrevocable trust effectively removes those assets from your estate when you die. That can be useful for wealthy people because the government taxes high-value estates when they die. But that’s not a problem most of us need to worry about because, as of this writing, the government does not tax the first $11 million from your estate. 

The same rationale applies to liability reduction. Because you no longer own or control the assets, you can’t be ordered to hand them over to a creditor. Thus, moving assets from yourself and into an irrevocable trust can put them beyond the reach of your creditors.

Whether you goal is to protect assets from creditors, guide your family after you pass, or save them the trouble of going through probate, forming a trust can be a useful tool to reach your goal. But deciding what kind of trust to create and how it will act once formed can get complicated quickly. So, don’t do it alone. And don’t do it with an online kit from an online provider who knows nothing about your situation or CNMI law. Get help from a local professional.

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Jordan Sundell is a lawyer primarily practicing business and real-estate law. He formerly worked for the CNMI Supreme Court and Bridge Capital and is now general counsel for several real-estate companies, including JZ Group. His columns—focused mainly on real estate and small business—are published every other Tuesday.

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This column is not intended as legal advice and is for informational purposes only. For your specific case, consult a lawyer.