What is a pourover trust?

Not to be confused with pour-over wills, a pourover trust is simply a way to plan for incapacity. Unlike a will, the pourover trust is not administered by a court, so its contents and terms are not part of the public record. This type of 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 time of death. Sometimes, a person will name him or herself “co-trustee” with an investment firm or trust company.

How does a pourover trust work?

A pourover 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 pourover trust is that it alleviates some of the burdens on loved ones when the trustee is unable to care for him or herself.

The pourover 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 pourover trust documents and again during the time leading up to the distribution of assets.

What are some other concerns when considering a pourover trust?

In addition to being concerned about taxes, you should consider how or whether you will use the assets in the pourover trust when setting it up. You can continuously add to the trust during your lifetime or fund it and leave it as a shell. What are some disadvantages of these kinds of trusts? Unless incapacitated, you cannot receive or distribute assets from the pourover 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 valuable assets into the pourover trust may not be the best option.

As noted earlier, a pourover trust is a separate document from a will and is not administered with court supervision. That means that a pourover 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. An experienced attorney can help you with any questions and explain any formalities involved in the process of setting up pourover trusts.

Case Studies: Understanding Pourover Trusts

Case Study 1: Ensuring Smooth Asset Distribution 

Mr. and Mrs. Johnson, a couple with substantial assets, decide to create a pourover trust to plan for potential incapacity and streamline the distribution of their estate. They appoint themselves as co-trustees during their lifetime, allowing them to manage the trust assets effectively. In the event of incapacity, their appointed investment firm acts as a co-trustee to ensure the proper management of assets.

When Mr. Johnson passes away, the pourover trust automatically transfers all assets back to their estate, where the trust assets are distributed according to their predetermined wishes. The pourover trust proves to be a valuable tool in planning for incapacity while preserving the confidentiality of their estate.

Case Study 2: Preserving Privacy in Estate Planning 

The Carter family, concerned about the public nature of probate and the potential disputes it may cause, decides to establish a pourover trust. They fund the trust during their lifetime, naming themselves as trustees. This allows them to retain control over their assets and make changes to the trust as needed.

When the time comes, their assets will pour over into the trust, ensuring a seamless transition of assets to their chosen beneficiaries. By utilizing a pourover trust, the Carters maintain privacy and avoid court supervision, providing their family with a smoother estate settlement process.

Case Study 3: Flexibility and Asset Liquidity 

The Williams family desires the flexibility to access assets during their lifetime while also ensuring efficient asset distribution upon their passing. They create a pourover trust and decide to continuously add assets to the trust over the years. This approach allows them to have control over the trust assets while maintaining liquidity during their lifetime.

In the event of incapacity, the trust provisions ensure that their assets are managed and used for their benefit. Upon their passing, any remaining assets in the trust pour over back into their estate and go through probate. By adopting a pourover trust strategy, the Williams family achieves both their short-term liquidity needs and long-term estate planning goals.