What is a pour over trust?
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Not to be confused with a pour-over will, a pour over trust is simply a way to plan for incapacity. Unlike a will, the pour over trust is not administered by a court, so its contents and terms are not part of the public record. A pour over trust allows a donor to set up a trust and act as trustee, or manager, during his or her life. Assets can be added to the trust during the trustee’s lifetime. Those assets stay in the trust until the trustee’s death. Sometimes, a person will name him or herself “co-trustee” with an investment firm or trust company.
How a Pour Over Trust Works
A pour over trust usually contains language that explains how the trust assets should be distributed when the donor becomes incapacitated or passes away. If the trustee is incapacitated but arranges to be co-trustee with another entity, such as a trust company or financial manager, the funds can be used to assist the trustee and can be distributed to his or her beneficiaries. One of the benefits of a pour over trust is that it alleviates some of the burden on loved ones when the trustee is unable to care for him or herself.
The pour over trust terminates at the death of the donor or trustee and all assets go back to the estate and must go through probate. This is because any property, regardless of how it was held, that is transferred to beneficiaries upon a donor’s death must go through probate. This is the reason for the name “pour-over”; any leftover assets after attending to the donor’s incapacitated years are “poured” back into the estate. This makes the trust a great tool for planning for incapacity. For some families, the distribution of property can raise concerns about taxes. It's important to consult with a tax attorney before setting up the pour over trust and again during the time leading up to distribution of assets.
Other Concerns When Considering a Pour Over Trust
In addition to being concerned about taxes, you should consider how or whether you will use the assets in the pour over trust when setting it up. You can continuously add to the trust during your lifetime or fund it and leave it as a shell. Unless incapacitated, you cannot receive or distribute assets from the pour over trust without revoking it. If you need a certain level of liquidity during the life of the trust, placing all or a substantial amount of assets into the pour over trust may not be the best option.
As noted earlier, a pour over trust is a separate document from a will and is not administered with court supervision. That means that a pour over trust is not part of the public record. However, any assets that return to the estate will go through probate and be subject to the same rules as the rest of the estate. This is another area in which close consultation with an estate planning attorney can prevent any unwanted outcomes.