What Is a Trust and Which One is Right for You?

A trust is part of your Estate Plan. Having an estate plan in place can offer reassurance that your assets will be managed according to your wishes, both during your lifetime and after you pass away. Having a will alone is not having the same as having an estate plan. Wills can be contested and have to go through a lengthy probate process. Instead, many people will use a trust to transfer assets to their loved ones.

There are several reasons why you might decide to establish a trust. Accordingly, there are many types of trusts, each corresponding to a different goal or financial situation. For the purpose we will concentrate more on the a Revocable and Irrevocable Trust. If you need to get your estate sorted, a financial advisor can help.

So, What Is a Trust?

A trust is a legal arrangement between two parties: the trustee and the trustor. The trustor (also known as the Settlor or Grantor) is the person who establishes the trust and transfers assets into it. The trustee is the person or entity responsible for managing those assets according to the wishes of the trustor.

While the trustor is alive, they can often times be the trustee of their own estate - unit their death.

A trust can have beneficiaries. Those beneficiaries may be your spouse, children, other family members, friends, charitable organization or even your pet. You can also name a church as a trust beneficiary. Those named as trust beneficiaries are entitled to receive assets from the trust, based on how you (the settlor) direct the trustee to distribute them.

The types of assets you may transfer to a trust include:

Real property, including homes, land or investment real estate
Deposit accounts held at banks and credit unions
Investments, including stocks, bonds and money market accounts
Life insurance policies
Business interests and assets
Collectibles and antiques

Funding a trust occurs when you transfer assets into the trust and under the control of the trustee. So, for tangible assets, like real property, the name of the property has to be transferred out of your name into the name of the Trust.

Advantages of Trusts for Estate Planning

A trust has benefits for creators and beneficiaries alike. You may consider a trust if you want to:

Pass on assets without going through probate (which is necessary for wills)
Create a plan for managing personal or business assets if you become incapacitated
Set aside assets to care for a special needs dependent
Establish rules or requirements beneficiaries must meet to receive their inheritance
Preserve assets for the care of minor children in the event that you pass away
Potentially reduce estate and gift taxes

Trusts allow you to prepare for the future of your loved ones. A trust can be a critical part of any estate plan, especially if you have small children. They are also helpful if you have older children who are “not capable of handling and managing the assets contained in the trust.” The stipulations you outline in the trust can help your beneficiaries use it wisely.

Revocable vs. Irrevocable Trusts

Before diving into specific types of trusts, it helps to understand the two broad categories of trusts.

Revocable Trusts

Revocable trusts, also referred to as revocable living trusts, allow you to maintain

control of your assets during your lifetime. You can change or dissolve a revocable

trust if necessary. This is why they are “revocable” trusts — you can “revoke” them.

For example, if you go through a divorce or acquire new assets, you may need to

update the terms of the trust to reflect the consequences of those events.

A revocable trust offers flexibility, since the transfer of assets and the guidelines

you’ve specified for the handling of those assets doesn’t become permanent until

you pass away. With a revocable trust, you have the option to name yourself the

trustee or co-trustee and choose someone to act as a successor trustee when you

die or if you’re otherwise unable to manage the trust.

Revocable trusts aren’t subject to probate. That means the assets in the trust go to beneficiaries without having to pass through the probate court. This allows for greater privacy than a will. And it can be more difficult for creditors to claim assets held in a revocable trust in order to satisfy any outstanding debts you may have.

Irrevocable Trusts

Once you establish an irrevocable trust, you cannot change or modify it in any way. If you transfer real estate or other assets you own to the trust, you can’t undo that action. Given that this means less flexibility, why establish one in the first place?

One main benefit is that it can work as a safe haven for the placement of assets, to protect those assets from claims of creditors, beneficiaries or even Medicaid.

Additionally, an irrevocable trust can also remove certain assets from your estate, sheltering them from estate and gift tax. That may be appealing if you have a large estate and need a way to minimize tax liability on those assets.

Bottom Line

A well-crafted estate plan will protect the interests of you and your beneficiaries. While a will is an essential part of the estate-planning process, a trust can ensure that your assets go to your loved ones without going through probate. However, before you create a trust for yourself, consider which type is best for you, at the current stage in your life. This decision is vital to how well your estate plan holds up.