You might think trust funds are reserved for the super-wealthy, but in reality a trust can be a smart estate-planning tool for all sorts of people. Used correctly, a trust can help give you more control over how your money and property are passed on after you die. It can also help your heirs avoid the lengthy legal process known as probate.
In the simplest of terms, a trust is a legal arrangement that involves three parties: the grantor, the trustee, and the beneficiary. Here’s the role each plays:
- Grantor: Also known as the trustmaker, this is the person who establishes the trust, establishes rules about how the trust should be managed, and funds the trust. Assets that become part of a trust can include everything from personal property and real estate to stocks, bonds, and life insurance policies.
- Trustee: This is the person (or, more rarely, institution) that’s tasked with managing the trust. Their duties can include managing the assets in the trust (such as buying or selling property or hiring an investment firm) as well as distributing them to beneficiaries. To do all of this, the trustee needs to follow the rules laid out in the trust documents (and any applicable laws). With a revocable living trust, the grantor and trustee are often the same person.
- Beneficiary: As the name suggests, this is the person who benefits from the trust. Sometimes the trustee and the beneficiary are the same person, but typically they are distinct roles.
Benefits of setting up a trust
There are many different types of trusts. But the main benefit of any trust is that it puts you fully in the driver’s seat—while you’re still alive—of how your assets will be handled once you die.
If you leave a loved one an inheritance through a will, they get access to that entire amount when you die. But if you put those assets into a trust, you can set any type of distribution as you like. That could mean spreading out disbursements over a period of years, making access to funds conditional (such as needing to be employed full-time), or earmarking funds specifically for education or medical care.
Some of the other benefits, such as avoiding certain taxes, depend on which type of trust you establish. A few types of trusts you might consider as part of your estate planning:
Irrevocable living trust
What it is: With an irrevocable living trust, the assets in your trust are now completely out of your hands and are controlled by the trustee. If you want to change how the eventual distribution works, you’ll need to clear it with the beneficiaries, but in some cases, that’s not allowed.
Why you may want it: You know who is getting what and you don’t see that changing. Plus, assets in this type of trust may not be considered part of your taxable estate, and therefore could provide a significant tax break.
Revocable living trust
What it is: A trust that allows you to retain control of all assets, which means you can take assets out of the trust, change who the beneficiaries are or the terms for how assets will eventually be distributed.
Why you may want it: Maximum control. You can still manage your assets as you’d like and change the terms of the trust as life changes occur.
Testamentary trust
What it is: This type of trust goes into effect once you’ve died. This is typically outlined in a will, which means you’ll still have to go through probate. Upon your death, the testamentary trust becomes an irrevocable trust.
Why you may want it: You don’t want to deal with the time and expense required to set up and manage a trust. You’ll still have more control over how your assets are handled and distributed, but you won’t need to bother with having it set up until the time comes to allocate assets to beneficiaries.
Bottom line: Everyone’s financial situation is different, so you’ll want to discuss all your options with an estate planning lawyer first to make sure you’re picking the best type of trust for your financial needs.
By Kate Rockwood
