Estate planning is an intricate yet powerful process. During it, you’ll find that there are several tools you can pull from to best protect yourself, your assets, and your loved ones. One such tool is a Trust. It’s a fiduciary agreement in which you give a third party the rights to manage assets on your behalf. You’ll come across different documents while setting up your Trust, and you’ll need to know what they stand for. Two of the main documents are the trust agreement and the certificate of trust. In this guide, we’ll break down the key differences between these two important estate planning documents.
What is a Trust Agreement?
A trust agreement is an estate planning document that allows you to transfer ownership of your assets to a third party. In this case, your legal role is “trustor,” while the other party’s role is “trustee.”
The objective of a trust agreement is to give the trustee the legal rights to manage your assets on your behalf, and for the eventual benefit of your beneficiaries. The trustee can either be an individual or an organization. They are responsible for distributing assets held in the trust per the wishes documented in the agreement.
What is a Certificate of Trust?
A certificate of trust is a document used by the trustee to prove that they have the legal right to act on behalf of the trust and trustor. Oftentimes, they’ll need to submit the certificate of trust to third parties, such as a financial institution, when conducting business on behalf of the trust.
What is the Difference Between a Trust Agreement and Certificate of Trust
A trust agreement and certificate of trust are both estate planning documents that are closely related. The trust agreement is the parent document that details anything and everything regarding the trust, including its agreements. Meanwhile, the certificate of trust is used in tandem to keep nonessential information confidential.
The certificate of trust verifies the following information on a need-to-know basis:
Existence of the trust
Names of the trustor and trustee
Powers granted to the trustee
Title to real property, if applicable
Taxpayer ID of the trust (either the trustor’s SSN or trust EIN obtained by the IRS)
The trustee of the trust should be prepared to produce a copy of the certificate of trust any time that they are conducting related business. Banks and other financial institutions will ask the trustee to present the certificate to verify that they are legally enabled to submit requests and take actions for accounts.
Who Are the Participants to a Trust Deed
There are three key participants when it comes to a trust deed: the settlor, the trustee, and the beneficiary.
The settlor (also known as the “trustor” or “grantor”) is the individual who set up the Trust. As a part of their estate plan, they will sign a Trust into effect. As a part of this process, they will transfer assets and property into ownership of the Trust.
When setting up their Trust, the settlor will name a third party as the Trustee. This role is entrusted to hold and manage the assets placed in the Trust for the benefit of its beneficiaries. Trustees can be an individual, a board of individuals, or a legal entity.
A beneficiary is the person who will receive distributions from the Trust. They are typically a direct family member of the person setting up the Trust, such as a child. There can be more than one beneficiary. The Trust will designate how and when assets should be distributed to the beneficiaries.
Advantages of a Trust
There are several advantages to setting up a Trust that you may have never considered before. Below, we preview several reasons to have a Trust:
1. You can skip probate court.
One of the biggest draws of setting up a Trust is the promise of avoiding probate court. Probate court is a lengthy, expensive process that cuts into the value of your estate plan, and also prolongs the amount of time it takes for your beneficiaries to receive their inheritances. Assets held in an estate help you skip this process altogether.
2. Reduce your taxable estate.
You can also reduce or avoid estate taxes altogether by transferring your estate into a Trust. However, different types of trusts offer different levels of tax protection. Review the different types of trusts to understand what kind of protection is offered.
3. Exercise control.
Last but not least, Trusts allow you to control your assets, even after you’re gone. In the case of a Will, your beneficiaries would receive a lump sum after your passing. Instead, a Trust agreement allows you to dictate how and when you want your assets distributed. If you have children with special needs, or those you worry about in terms of their spending habits, a Trust is a great option that offers extra protection.
Disadvantages of a Trust
Most individuals would argue that the advantages far outweigh the disadvantages. However, you should always weigh your options and form your own opinion. Here are possible disadvantages associated with a Trust:
1. Time and cost.
Setting up a Trust is more costly and time-consuming, relative to setting up a Will. That’s because they are more intricate to set up and maintain, and involve more paperwork. However, this is a necessary step that’s a part of creating a foolproof estate plan. However, you can rest assured that at Trust & Will, we offer a Trust creation process that’s as easy and cost-effective as possible.
2. No creditor claim cutoff.
Everyone squirms at the idea of probate court, but it does have one key advantage. When an estate passes through probate, the judge will establish a deadline for any creditors to submit claims. After this deadline, creditors can no longer try to make any claims that could eat into the value of your estate. Because Trusts don’t go through the probate process, there is no cutoff date for creditors.
3. Exposure to risk of embezzlement.
When setting up a Trust, it’s of utmost importance to select a trustworthy Trustee. You are giving this individual or entity the fiduciary right to manage and distribute assets placed within the Trust. This means that there is always a risk of embezzlement or extortion. However, you have control over this process and you can take care to choose a Trustee whom you can trust.
Types of Trusts
Although there are many different types of Trusts available to your disposal, they typically fall into one of two categories: revocable trust vs. irrevocable trust.
Revocable Trust: A revocable trust is one that can be revoked or modified. Most individuals set up a revocable trust during their lifetime, especially when they expect for their circumstances to change. For example, important life events such as the addition of new family members (or sadly, any deaths) can change how you might want to structure your Trust. This is also the case for when you expect for your mix of assets to change.
Irrevocable Trust: An irrevocable trust is one that cannot be revoked or changed. Most revocable trusts convert into an irrevocable trust upon the death of the grantor. This ensures that their wishes are preserved. However, a living person might choose to set up an irrevocable trust during their lifetime for tax planning purposes.
Protecting Your Assets With a Trust
Many families choose to add Trusts into their estate planning mix. That’s because they realize how powerful they can be. They can offer tax protection, help families avoid probate, and offer a lot of flexibility in how an estate will be managed and distributed.
If you feel called to further explore whether or not a Trust is the right fit for you, we invite you to check out our Trust page, which includes an overview of included documents, which of course include the Trust Agreement and Certificate of Trust. Our support team is available to help you through the process of setting up your Trust, which can be done in under 15 minutes.