Trusts

By Scott Grayson, Esq. | Reviewed by Andrew Leonatti

Last updated October 6, 2023

Imagine you have some valuable items you want someone else to care for. You want your valuables to be protected, so you give the person instructions they must follow. Then, in the future, you want the person to give some of your valuables to your family so they can use them. That’s how a trust works.

This article discusses trusts. It explains how they work and gives examples of the different types of trusts. Trusts are complex legal documents governed by state law. It’s best to talk to an estate trust attorney in your area for help. They can ensure your trust meets your goals and follows your state’s laws.

What Is a Trust?

A trust is a legal entity that holds property for the person who made the trust. Someone manages the trust property for the benefit of a third party. The person who makes the trust is the grantor or settlor. The person who manages the trust property is the trustee. The beneficiary is the person who benefits from the trust. The trust is a written document that includes the terms of the trust.

Here’s an example to help explain the basic concept: Suppose you own property, like real estate. You can set up a trust and transfer your real estate to it. Your trustee manages the real estate. They also make distributions from the trust to your family members. In this case, that may be money from the trustee selling the piece of property. You tell the trustee how they should manage and distribute your property in a trust document.

The trustee is a fiduciary. That means they must responsibly manage the trust property. They could be liable for a breach of fiduciary duty if they don’t follow the instructions in the trust agreement.

What Are the Types of Trusts?

There are many kinds of trusts. Generally, they fall into two general categories: revocable and irrevocable. A revocable trust is one you can change or terminate at any time. They are popular replacements for the last will and testament in an estate plan.

An irrevocable trust is a trust you can’t change or terminate without a court’s involvement. People often use these trusts for tax benefits and asset protection. The following are some examples of common irrevocable trusts:

Special needs trust (SNT): An SNT is a trust that benefits someone with special needs.
Charitable trust: A charitable trust allows you to direct assets to charities of your choosing.
Testamentary trust for minor children: A testamentary trust is a trust created in your will or revocable living trust. It only comes into existence once you die. These trusts are popular for leaving an inheritance to minor children.

What Are the Benefits of a Trust?

Many think that trusts are only for the ultra-wealthy. But people of all income levels can benefit from having one. These are some of those benefits:

Avoiding Probate

You can use a revocable living trust to transfer assets after you die. The primary reason for using a trust is to avoid probate.

Probate is a legal process administered by a probate court. During probate, the court validates your will. Your personal representative can only distribute your property once the court gives its permission. The probate process can be long and expensive. In avoiding probate, a trust can lower the time and cost to administer your estate.

Privacy

The probate process is a public record. That means anyone can get information about your estate. Since a revocable living trust avoids probate, it offers an added layer of privacy.

Asset Protection

You can put assets in an irrevocable trust to benefit your family. An irrevocable trust can protect trust assets from creditors and lawsuits. Another benefit is that you control how the trustee makes distributions. For example, distributions can only be used for education or health care.

Tax Planning

Some types of trusts have tax benefits. An example is the grantor-retained annuity trust (GRAT). In a GRAT, the amount that the trust assets appreciate goes to your loved ones tax-free. That lowers your estate’s value, reducing the estate tax it has to pay. The transfer to your heirs is also not subject to the gift tax.

Contact an Estate Planning Attorney for Help

Trusts are complex legal documents. Talking to an experienced trust attorney for help making one is a good idea. Otherwise, your trust may not do what you’re expecting. A trust attorney can give you legal advice and help you set up a trust that accomplishes your goals.

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