Understanding Trusts: The Basics for Physicians

One of the more confusing aspects of financial life is the use of trusts.

Most physician families that have had estate planning done will find that they have a "living trust" in their documents.  Some families actually have re-titled assets in the trust name/ownership.

Think of a trust as a bucket.  The bucket holds assets.  What happens to the assets is determined by a "trustee" who follows the dictates of a trust document.

A living/revocable trust
A living trust is by definition, initially revocable. That is, it can be revoked or changed by the person forming the trust (the granter of the trust). 

For example, you might have a living trust document, and you may have titled some assets as owned by the trust.  You are the granter of the trust, and are almost certainly both the trustee and the beneficiary of the trust while you are alive. 

You also retain the right to "revoke" any of the actions that put assets into or take assets out of the trust.  This revocable character is important, as it means the trust offers no asset protection during your life.  

If you have a judgment against you, a judge can simply order you to move assets from the trust to your creditor. Thinking that you have asset protection with a revocable trust is one of the largest misunderstandings encountered in the fields of estate planning and asset protection.

An irrevocable trust
When you die, the trust becomes "irrevocable," in that you, as the granter, are no longer around to change it.  Assets can still be deposited into the trust (it is common to have a "pour-over will," that instructs your executor to pour any solely-owned assets at your death into the trust). 

Since you are dead, you can no longer be compelled to disgorge assets from the trust, and the document is usually written in a fashion that protects the beneficiaries from creditors.  Most often, these (previously living/revocable) now irrevocable trusts provide for spouses and children in a written specific fashion.  I’ll touch on some of the finer points in other articles.

Credit shelter trusts
It used to be very important to have spouses split up assets and have what were called “credit shelter trusts” in order to preserve the individual allowable estate tax deduction.  However, for the last few years, these trusts are no longer necessary to provide for the approximate 10.4 million dollars that a couple may leave heirs without estate taxes.  There are other reasons to consider credit shelter and other trusts, but that is for another time.  For most of us, estate taxes are no longer a typical reason.

Note that trusts do not usually dispose of tangible property or take care of immediate estate matters (including who is the guardian of your children and who will be your personal estate executors).  This job is done by your will.  As noted above, it is not uncommon however for a trust document to govern much of your assets after the estate has settled.