Trusts: An Explanation of What They Are and How They Could Benefit You
A trust is a legal relationship in which one person, the Grantor, transfers property to another person known as the Trustee. The Trustee then holds the property, managing and using it for the benefit of a third person, known as the beneficiary. The property can be almost any type of property- money, real estate, business interests, securities, etc. The Grantor may also be referred to as the Donor, Settlor or Trustor. Depending upon the type of trust, the Grantor, Trustee and Beneficiary may be three different individuals, or in some instances, they may all be the same person. The document which creates this relationship and spells out the terms is known as the “trust agreement.” Once created, a trust is a legal entity which is capable of owning property. It may even have its own tax payer identification number and have to file income tax returns.
Trusts are usually defined by two characteristics. The first characteristic is the point in time at which the trust was created. A trust that was created during the Grantor’s lifetime is called an “inter vivos” trust. A trust that was created, or takes effect, upon the death of the Grantor is called a “testamentary” trust.
The second characteristic which defines a trust is whether it is “revocable” or “irrevocable.” With a revocable trust, the Grantor keeps the authority not only to change the terms of the trust, but also the authority to revoke, or undo, the trust completely. An irrevocable trust may not be changed or revoked, even by the Grantor, once it has been properly created. Property that has been placed in a revocable trust can be removed by the Grantor at will. Property held in an irrevocable trust cannot be removed once it has been placed in the trust, even by the Grantor.
Putting property in trust, a process also referred to as “funding the trust,” occurs when the Grantor actually transfers ownership of the property to the trust. However, although the trust is the actual owner, the Trustee is the legal representative of the trust. Therefore, the Trustee’s named is usually used in the new title designation. The Trustee, however, has no personal ownership of the assets. The Trustee only holds and manages the property in accordance with the instructions described in the trust agreement, as well as other restrictions or authority permitted by law. For example, if John Smith created a trust for himself, but named his daughter, Jane, as the trustee of that trust, the new title designation may read “Jane Smith, Trustee of the John Smith Trust.” Caution should, however, always be used when “funding” a trust because changing the title to the asset may not necessarily be the correct action to take. With some assets it may be more appropriate to change the beneficiary designation. The purpose of the trust as well as the type of asset (real estate vs. savings account vs. IRA) will dictate what should be done. Proper guidance from either a financial or legal professional should always be sought when funding a trust.
What are the most common types of trusts? Revocable living trusts (also known simply as living trusts or revocable trusts) have become increasingly popular. As the name implies, this is an “inter vivos” and “revocable” trust, meaning it is created during the Grantor’s lifetime and the Grantor keeps the authority to amend or revoke the trust. The revocable living trust is also an example of a trust where, at least initially, the Grantor, Trustee and beneficiary are all the same person. The usual purpose of this trust is to provide for the transfer of the Grantor’s assets to the beneficiaries upon the Grantor’s death without going through the court supervised probate process.
Also common is the “testamentary” and “irrevocable” trust created through the Last Will and Testament of the parents for the benefit of their children. This type of trust allows the parents to provide for their children’s financial needs in the event of the parents’ death, but with a more mature, financially responsible person as Trustee to manage the money until the children are older. A similar trust of this nature would be a “special needs” trust which allows the parent, or other person, to provide financial support for a disabled beneficiary in a manner which would allow the disabled beneficiary to also keep any governmental benefits (such as Medicaid or SSI) they may receive.
Trusts have a variety of purposes and are extremely useful tools to use in your estate plan. However, there is no one trust that is appropriate for every individual. The trust that works for your neighbor may not be the right trust for you. Careful consideration of all of the factors, as well as the assistance of legal counsel, should be part of the planning process.Like this article? Please share it: