Trusts are often an integral part of a comprehensive estate plan. The basic definition of a trust is that it is a fiduciary contractual agreement that allows a third party, the trustee, to hold and manage assets on behalf of beneficiaries. Probably the most well-known benefit and often cited reason for creating a trust is to avoid the probate process at death. A properly drafted trust can avoid probate which allows beneficiaries to access their assets more quickly than if the same assets were transferred through a will. Additionally, a trust may reduce costs of administration upon your death.
Another benefit of a trust is the ability to control assets through a trust. A trust can specify the terms exactly how you would like, such as who is to get distributions from the trust and when those beneficiaries may receive them. Often times a married couple will set up a trust to come into effect upon the death of the survivor for the benefit of the children. A trust allows the assets to be protected for a certain timeframe. Additionally, trusts can allow assets to pass outside of probate which allows financial aspects of a person’s assets to remain private, whereas probate is a matter of public record.
All trusts fall into two types known as revocable and irrevocable trusts. The revocable trust, aka a living trust, helps assets pass outside of probate but still allows the grantor to retain control of assets during his/her lifetime. The revocable trust can be flexible and can be dissolved should life circumstances or desires change. In a revocable trust, the grantor is generally named as his/her own trustee to manage assets while alive and mentally competent, with a successor named if the need arises.
Irrevocable trusts differ from revocable trusts in the fact they cannot be revoked or amended. It is important to remember that once an irrevocable trust is established, full control is lost over the assets and, except in limited circumstances, the terms of the trust cannot be altered. An irrevocable trust can be used to reduce estate taxes by moving assets out of your estate for tax purposes. This differs from revocable trusts in which assets are still considered owned by the grantor as you have full rights to revoke the trust at any time.
Consulting an attorney experienced in trusts and estate planning is advisable.