What Is a Trust?
A powerful legal document that helps you transfer assets as intended
on May 26, 2022
Updated on June 17, 2022
Trusts are powerful tools in estate planning. They are legal agreements wherein a person, the grantor, enlists someone else, the trustee, to hold and manage the trust assets on behalf of a third party, the beneficiary, for a designated period of time. Trust beneficiaries are typically loved ones such as a surviving spouse or children.
In a trust, the grantor forms a fiduciary relationship with the trustee, who is assigned with protecting the grantor’s assets until a time when they can be distributed to the beneficiaries in accordance with the grantor’s wishes. There are different types of trusts available depending on the needs of the grantor.
Why People Create Trusts
The main reason to create a trust is to ensure your wishes are met as it pertains to beneficiaries receiving the assets you’ve intended for them. Still, there are benefits to trusts that might not be initially apparent. Consider the following reasons that people create trusts:
- Protect minor beneficiaries. When a person dies, their assets pass to the surviving spouse and children. But what if those children are minors under eighteen? In such instances, a trustee is required to protect the assets until the minor reaches adulthood.
- Protect assets. Trusts are one of the safest methods to protect your assets. Suppose you entrust your assets to a family member without a trust document in place. Even with good intentions at heart, your family member can mismanage your assets in any number of ways, disrupting your ultimate wishes. Having a trust ensures that your assets are safe until your beneficiaries collect.
- Maintain privacy. Some jurisdictions require that people disclose the terms of their will. In such jurisdictions, many grantors opt for trusts because they allow them to use terms similar to a will while keeping their wishes private.
- Reduce estate tax. Believe it or not, trusts can actually help ease your tax burden. Depending on how you structure your assets, there can be certain tax savings both for the grantors and the intended beneficiaries. Because these benefits can vary by jurisdiction, it’s important to seek out an estate planning attorney with experience in your local tax laws.
- Avoid probate process. Passing away without a thorough estate plan can lead to disputes among your loved ones over the division of assets. These disputes end up in probate court where a judge could make decisions that don’t reflect your true intentions. For this reason, it is vital to create a legally-sound estate plan that has been overlooked by someone with knowledge of the ins and outs of estate planning law.
Different Types of Trusts
Revocable vs. Irrevocable Trusts
If you’ve begun researching trusts, you’ve likely come across these terms. A revocable trust, sometimes called a living trust, lets the grantor create and maintain the trust as they see fit, until a time when they die or other conditions have been met so the beneficiary can collect. Revocable trusts can be altered throughout the grantor’s lifetime.
Alternatively, irrevocable trusts are legal documents that cannot be altered after their creation. In fact, the grantor relinquishes control over the asset upon creation of the irrevocable trust. Depending on the grantor’s financial situation, these trusts can offer state and federal estate tax exemptions that revocable living trusts do not. Any potential grantors weighing out the pros and cons of these trusts should enlist the services of an estate planning attorney.
Types of Trusts
There are many different kinds of trusts for grantors to choose from, all with their own unique benefits. Again, this is where an estate planning attorney is critical, as they can listen to your needs and wishes and determine which type of trust best suits your needs. Here are a few examples of the many types of trusts that are available:
- Living Trust. As stated above, living trusts are documents that account for an individual’s assets. They can be revoked at any time throughout the grantor’s life. Once the trust’s creator is no longer able to maintain the trust, a successor trustee manages the assets until they can be received by the beneficiaries.
- Testamentary Trust. Testamentary trusts are created through a will and go into effect when the creator has died. Typically, wills include special language indicating the decedent’s intention to create a testamentary trust.
- Special Needs Trust. These trusts are intended for disabled loved ones, to ensure their needs are met when the decedent is no longer able to maintain their health care and wellbeing.
- Charitable Remainder Trust. These are trusts that allow grantors to leave any remaining assets to specific charities and non-profit organizations should there be anything left upon dissemination to beneficiaries.
- Credit Shelter Trust. Sometimes referred to as a “family trust,” this trust allows you to bequeath assets meeting but not exceeding the estate tax exemption.
Questions for an Estate Planning Attorney
Many real estate attorneys provide initial free consultations to prospective clients. These meetings are a great resource for both attorney and client because it allows the attorney to hear the facts of the case while the client can determine if the attorney meets their needs.
The best way to decide whether an attorney is the right fit is by asking informed questions. Here are some good questions to ask during your initial conversations:
- Am I or my beneficiaries subject to a gift tax from the Internal Revenue Service (IRS)?
- Can I set up a trust to draw from multiple bank accounts?
- What are best practices to avoid violating the terms of the trust?
- How much do you charge for your services and what types of fee structures do you offer?
Finding the Right Attorney For Your Needs
It is essential to approach the right type of attorney—someone who can help you through your entire case. To do so, you can visit the Super Lawyers directory and use the search box to find a lawyer based on your legal issue or location.
To help you get started, you may want to consider looking for a lawyer who practices estate planning and probate.