A trust is a legal relationship in which one person (the “trustee”) holds legal title to property for the benefit of another person (the “beneficiary“). The property in a trust can be almost anything, including money, stocks, real estate, and personal property.
How does a trust work
A trust is created when a person (the “grantor” or “settlor”) transfers ownership of their property to a trustee. The trustee is then responsible for managing the trust property and distributing it to the beneficiary according to the terms of the trust.
There are two types of trusts: revocable trusts and irrevocable trusts.
Revocable vs. irrevocable trusts
A revocable trust is a trust that can be modified or revoked by the grantor at any time. This means that the grantor can change the terms of the trust or take back the property that has been placed in the trust.
An irrevocable trust is a trust that cannot be modified or revoked by the grantor once it has been created. This means that the grantor cannot change the terms of the trust or take back the property that has been placed in the trust.
Common types of trusts
Living Trusts
A living trust is a trust that is created during the grantor’s lifetime. It allows the grantor to transfer ownership of their property to a trustee, who will manage the property and distribute it to the beneficiary according to the terms of the trust.
Testamentary Trusts
A testamentary trust is a trust that is created in a person’s will and becomes effective upon their death. It allows the person to specify how their property should be managed and distributed after their death.
Charitable Trusts
A charitable trust is a trust that is created for the purpose of benefiting a charitable organization. It allows the grantor to specify how their property should be used to support the charitable organization.
Joint Trusts
A joint trust is a trust that is created by two or more people for their mutual benefit. It allows the trustees to manage and distribute the trust property according to the terms of the trust.
Blind Trusts
A blind trust is a trust in which the grantor places their assets in the trust without knowing how they will be invested. This allows the grantor to avoid conflicts of interest and maintain their privacy.
Qualified Terminable Interest Property Trust
A qualified terminable interest property (QTIP) trust is a type of trust that is often used in estate planning. It allows the grantor to provide for their spouse during their lifetime and specify how their property should be distributed to their children after their spouse’s death.
Grantor Retained Annuity Trust
A grantor retained annuity trust (GRAT) is a type of trust that is often used in estate planning. It allows the grantor to transfer property to the trust and receive an annuity payment for a specified number of years
Irrevocable Life Insurance Trust
An irrevocable life insurance trust (ILIT) is a trust that is created to hold a life insurance policy. The trust is the owner and beneficiary of the policy, and the proceeds of the policy are used to pay any estate taxes or other debts when the insured person dies.
Irrevocable Funeral Trust
An irrevocable funeral trust is a trust that is created to pay for a person’s funeral and burial expenses. The trust is funded with the person’s assets, and the funds are used to pay for the funeral and burial when the person dies.
Spendthrift Trust
A spendthrift trust is a trust that is designed to protect the trust property from the beneficiary’s creditors. The trustee is responsible for managing and distributing the trust property according to the terms of the trust, and the beneficiary cannot sell or transfer their interest in the trust.
Special Needs Trust
A special needs trust is a trust that is created to provide for the care and support of a person with disabilities. The trust is funded with the person’s assets, and the funds are used to pay for their medical and support expenses.
Generation-Skipping Trust
A generation-skipping trust is a trust that is designed to skip a generation in the distribution of the trust property. The trust property is distributed to the beneficiaries, but it is not included in their estates for estate tax purposes.
Totten Trust
A Totten trust, also known as a “payable on death” (POD) account, is a type of trust that is created with a bank account. The account owner names a beneficiary, and the account funds are transferred to the beneficiary when the owner dies.
Is a trust better than a will?
Whether a trust is better than a will depends on the specific circumstances and goals of the person creating the trust or will. A trust can offer some advantages over a will, such as avoiding probate and providing more privacy, but it can also be more expensive and time-consuming to create and maintain.
Pros and Cons of a Trust?
Some pros of a trust include:
- Avoiding probate: Property held in a trust does not have to go through the probate process, which can save time and money.
- Providing for loved ones: A trust can be used to provide for loved ones, such as children or a spouse, and ensure that the trust property is used for their benefit.
- Protecting assets: A trust can be used to protect assets from creditors, lawsuits, and other potential threats.
- Maintaining privacy: A trust can be used to keep financial matters private, as trusts are not made public like wills.
Some cons of a trust include:
- Cost: Trusts can be more expensive to create and maintain than wills, as they often require the services of an attorney and other professionals.
- Complexity: Trusts can be complex legal documents, and they may require ongoing management and administration.
- Inflexibility: Once an irrevocable trust is created, the grantor cannot change the terms of the trust or take back the property placed in the trust.
Reasons to have a Trust?
There are several reasons why someone might want to create a trust:
- To avoid probate: Property held in a trust does not have to go through the probate process, which can save time and money.
- To provide for loved ones: A trust can be used to provide for loved ones, such as children or a spouse, and ensure that the trust property is used for their benefit.
- To protect assets: A trust can be used to protect assets from creditors, lawsuits, and other potential threats.
- To manage assets for a minor or incapacitated person: A trust can be used to hold and manage assets for a minor or incapacitated person until they are able to manage the assets themselves.
- To maintain privacy: A trust can be used to keep financial matters private, as trusts are not made public like wills.
- To reduce taxes: A trust can be used to reduce estate taxes and other taxes on the transfer of assets.
- To support charitable causes: A trust can be used to support charitable causes, such as a charitable trust or a charitable remainder trust.
- To provide for special needs: A trust can be used to provide for the care and support of a person with special needs, such as a special needs trust.
It is important to carefully consider the reasons for creating a trust and whether it is the best option for achieving a person’s financial and estate planning goals. It may be helpful to consult with a financial advisor or attorney to determine the best course of action.
