What Is A Trust?

Man preparing documents

A trust is a fiduciary relationship in which one party (the grantor) gives a second party (the trustee) the right to hold title to property or assets for the benefit of a third party (the beneficiary).

A trust agreement is generally prepared by an attorney who specializes in estate planning. Based on the grantor’s objectives, the attorney will draft a trust that addresses the following questions:

  • Who (if anyone) will receive the trust income?
  • How long will the income payments (or accumulation of income) last?
  • Who will receive distributions of principal and when?
  • When does the trust terminate?

Creating a trust is more expensive than writing a will but offers unique benefits, such as:

  • Providing for professional property management
  • Reducing taxes
  • Transferring assets efficiently at death
  • Providing flexibility in disposing of assets
  • Avoiding probate, which avoids costs and delays
  • Protecting privacy because, unlike a will, a trust is not open to public scrutiny

Trusts are designed to help you protect your wealth today and maximize your legacy for future generations. Each trust is unique, but there are some common elements and structures.

Testamentary Trust vs. Living Trust

A testamentary trust is established by will. When the grantor dies and the will goes through probate, the trust becomes effective, and the designated assets are transferred to the trustee.

However, some estate owners want their assets to avoid probate, and therefore create a living trust. A living trust, as the name implies, is established during the grantor’s life. At the grantor’s death, the trust assets are distributed to named beneficiaries according to the trust terms.

Revocable vs. Irrevocable Trust

A revocable trust provides flexibility. It gives the grantor the freedom to change trust provisions or to sell, spend, or give away trust assets. The grantor can instruct an attorney to prepare a written amendment to the trust at any time without tax or other penalties. In addition, the grantor can revoke the trust entirely at any time and reclaim outright ownership of the trust property. This provides added security for individuals who are concerned about not having access to assets in case of a future emergency. Revocable trusts do not have creditor protection or tax savings benefits.

An irrevocable trust requires the grantor to give up all control of the assets, with no opportunity to make changes in the future. Assets transferred to the trust are treated like a gift and are subject to the federal gift tax. In exchange, the grantor receives an exemption from federal estate taxes. This works out well for grantors who wish to give assets to children or grandchildren while minimizing estate taxes.

Who is In Charge of the Trust?

Once the grantor has transferred assets to the trust, the trustee administers and operates the trust. The trustee is responsible for:

  • Following all directions in the trust document
  • Investment and protection of the assets in the trust
  • Filing tax returns
  • Reporting to beneficiaries
  • Making income and principal distributions as permitted by the trust

The trustee must be impartial and independent in dealings with the beneficiaries and may be one or more individuals or corporations. Sometimes the individuals and the corporations serve together as co-trustees, or a firm can serve as Agent for Trustee.

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