A Beginner's Guide to Trusts
The concept of a trust fund carries a certain mystique, but exactly what is a trust? In simplest terms, it's a legal agreement between three parties:
- The trustmaker: This is the individual who creates the trust agreement, also commonly referred to as the grantor, trustor or settlor.
- The trustee: This person or entity is responsible for managing the property the trustmaker transfers into and titles in the name of the trust.
- The beneficiary or beneficiaries: These people or entities receive the benefits of the property titled in the name of the trust.
The trustmaker transfers ownership of certain assets to the trust and the trustee, and the trustee then manages them for the benefit of the beneficiary or beneficiaries.
What Is a Living Trust?
A living trust is one that is created and goes into effect during the trustmaker's lifetime. It's sometimes referred to as an "inter vivos" trust.
Some trusts don't go into effect until after the trustmaker has died. These are "testamentary" trusts. A testamentary trust is typically formed by the executor of the decedent's estate when his last will and testament names the trust as a beneficiary. The will directs that his property should be moved into the trust at his death.
Revocable Living Trusts
In most cases, the trustmaker, trustee and beneficiary of a revocable trust are the same person. The trust agreement may cite other beneficiaries as well, those who will inherit from the trust after the trustmaker's death. The two most common purposes of a revocable living trust are to plan for mental disability and to avoid probate of the assets the trustmaker funds into his trust before his death. The creator of the trust can name someone else, called a "successor trustee" to take over should he become mentally incapacitated.
This avoids having a court name a conservator or guardian to take over his financial affairs when he's unable to.
Irrevocable Living Trusts
In most cases, the trustmaker can't act as trustee if he forms an irrevocable trust. The most common use of an irrevocable trust is to move assets out of the trustmaker’s name to the next generation for their use and enjoyment, which in turn reduces the value of the trustmaker’s estate for estate tax purposes.
You cannot take your property back after you transfer it into an irrevocable trust. The trustmaker reserves the right to dissolve or change his revocable trust at any time, but an irrevocable trust is, for the most part, forever.
Other Types of Trusts
All living trusts are either revocable or irrevocable, but they can be designed to meet specific purposes as well within these frameworks.
- An irrevocable life insurance trust or ILIT holds only an insurance policy on the trustmaker's life. The policy is owned by the trust so its proceeds are not generally included in the gross value of the decedent's estate for estate tax purposes.
- A special needs trust is set up to provide for a disabled beneficiary in such a way that it doesn't compromise his entitlement to Supplemental Security Income or Medicaid benefits
- A spendthrift trust gives the trustee discretion as to how and when distributions should be made to a beneficiary who isn't financially responsible, or to safeguard the inheritance in the event the beneficiary divorces.
If you want to form a trust for a specific concern or reason, speak with an estate planning attorney. Almost certainly, there's a trust out there to meet your needs.