A trust is a formal legal arrangement allowing an individual (called the grantor or settlor) to transfer ownership of assets—such as cash, real estate, or investments—to a trustee. The trustee then manages these assets for the benefit of designated beneficiaries according to the grantor’s instructions written in the trust document. Unlike a will, which only takes effect upon death, certain trusts (like living trusts) can manage assets during the grantor’s lifetime and after their death, providing flexibility and continuity.
Historical Background
Trusts originated in medieval England when landowners headed to the Crusades needed to protect properties by transferring ownership to trusted agents until they returned. This evolved into modern legal trusts governed by fiduciary duties and detailed regulations.
Key Roles in a Trust
- Grantor (Settlor): Creates the trust and decides the terms, including which assets to place in trust and who will benefit.
- Trustee: The individual or institution responsible for managing the trust assets in the best interest of the beneficiaries. Trustees have a fiduciary duty to act prudently and transparently.
- Beneficiaries: Persons or entities designated to receive benefits—income or principal—from the trust as specified by the grantor.
Common Types of Trusts
- Revocable Living Trusts: Allow the grantor to retain control, modify, or revoke the trust during their lifetime. These trusts help avoid probate and offer asset management if incapacitated but do not shield assets from estate taxes.
- Irrevocable Trusts: Once established, these cannot be changed without beneficiary consent. They remove assets from the taxable estate, offering potential estate tax reduction and creditor protection.
- Testamentary Trusts: Created through a will and activated after death. Useful for managing inheritances, especially for minors or those needing special oversight.
- Special Needs Trusts: Designed to provide for disabled beneficiaries without affecting government benefits eligibility.
- Charitable Trusts: Facilitate charitable giving while possibly providing income or tax benefits to the grantor or family.
Benefits and Uses
Trusts offer:
- Probate Avoidance: Assets in a properly funded living trust bypass the public probate process, speeding up distribution and maintaining privacy.
- Incapacity Planning: Trusts can designate how assets are managed if the grantor becomes incapacitated.
- Estate Tax Planning: Irrevocable trusts can reduce estate tax liability by removing assets from the taxable estate.
- Privacy: Trusts are private documents, unlike wills that become public during probate.
- Control and Flexibility: Grantors can set detailed instructions for asset distribution and management.
Funding Your Trust
A critical step is transferring asset ownership into the trust’s name. Without funding, the trust remains ineffective, and assets are subject to probate.
Trust vs. Will
While wills distribute assets after death through probate, trusts can manage assets both during life and after death, often avoiding probate and providing additional benefits like incapacity planning.
For more detailed information on probate and estate planning, see our glossary entries on Probate and Estate Planning. Learn about the role of a Trustee and types of trusts such as Revocable Trusts and Irrevocable Trusts.
Recommendations for Setting Up a Trust
- Consult a qualified estate planning attorney to draft your trust.
- Choose a trustworthy and capable trustee.
- Regularly review and update your trust to reflect changes in life and law.
FAQ Highlights
Can I be my own trustee? Yes, common with revocable living trusts.
What if I don’t fund the trust? Assets remain subject to probate.
Are trusts expensive? Initial costs are higher than wills but can save time, money, and taxes in the long run.
Do I still need a will? Yes, a pour-over will complements a trust.
Are trusts public? No, trusts generally remain private.
External Resources
- Internal Revenue Service, “Estate Tax,” https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax
- Investopedia, “Trust,” https://www.investopedia.com/terms/t/trust.asp
This comprehensive overview helps you understand the purpose, structure, and benefits of trusts in modern financial and estate planning.
