From Our “Ask a Question” mailbag: “What is a Trust?”
Most recently updated on June 8th, 2018.
“I keep hearing that I need a Trust. However, I don’t know anything about trusts. What is a Trust? Can you provide me with an Introduction to Trusts?”
What is a Trust?
For centuries, trusts have been formed to provide safety and protection for valued assets. Recent changes in the law have made this old institution even more popular by reducing trust’s ongoing maintenance costs. You might think that only the very wealthy need the protection of a trust, but the truth is that a trust is a huge benefit to anyone having an asset in need of protection from their children’s creditors, divorce or from self-destructive beneficiaries.
A Trust Definition.
Trusts are a legal arrangement where a person called a grantor or settlor signs a document called a trust, usually drafted by an estate planning attorney, which names another person or entity as trustee with the duty and responsibility to hold an asset for the benefit of a beneficiary. In most cases, the grantor, trustee, and beneficiary are three separate persons, but you may form a trust where one person serves in all three positions. (see my article “Revocable Living Trusts”)
What is a Trustee?
The trustee is typically an individual, attorney, bank or trust company. Deciding who would be best to serve as your trustee will depend on many factors. These factors include your goals and concerns, the beneficiary’s age and abilities and the type of assets you will be using to fund the trust. Whoever you name as trustee will serve as a fiduciary. A fiduciary has duties and responsibilities to the beneficiary. Being a trustee is not necessarily a fun job, and it comes with varied responsibilities. The trustee must manage the trust assets, communicate with the beneficiary, file tax returns and follow relevant state and federal rules.
Who Owns The Assets in the Trust?
Once placed into the trust the trust is the legal owner of the property deemed within it, just as if a person owned the property. For example, if you fund a trust with a house, the deed to the property will now name the trust as the owner, just as if you had sold the property to a third person. Future tax bills will name the trust as the owner, and the trustee will be responsible for buying insurance, obtain utilities and sign lease agreements.
Can I Form a Trust While I am Alive?
The grantor may form a trust during the grantor’s life. These trusts are called inter vivos trusts. Trusts established by a will are testamentary trusts. These trusts come into effect only after death.
A popular type of inter vivos trust often referred to as a revocable living trust. This type of trust is used to replace a will. The settlor retains the right to change or revoke the trust during lifetime, so even though the trust owns the legal right to property, the grantor can reclaim the property at any time. Another class of inter vivos trust is irrevocable trusts, which generally do not allow the grantor the right to recover property transferred into the trust. These trusts all serve different purposes within an estate plan, and they may help the goals of one client perfectly, but be unsuitable for another client.
If your chief concern is avoiding probate and have very little fear about creditors, and do not wish to give up control over your assets, a revocable living trust might be a perfect fit for you. Revocable Trusts are often useful if you live in Manhattan or Palm Beach, Florida. Probate fees are high in both New York and Florida. An irrevocable trust could also solve the issue of avoiding probate, but using an irrevocable trust also means giving up control over the asset. By consulting with an estate planning attorney, you can weigh the pros and cons of both trusts and select the trust that serves your goals best.
In the alternative, if the settlor lives in Philadelphia or Cherry Hill, New Jersey, where probate fees are lower, a revocable living trust might be an unnecessary expense, but if that same person has concerns about future creditors, then forming and funding an irrevocable trust might be an excellent choice.
Is Running a Trust Expensive?
At one time trusts were tools that had significant ongoing costs, which limited them to the wealthy. This is no longer true. Changes to the tax code and state laws allow trusts to provide significant asset protection with virtually no ongoing costs.
Trust Advantages and Disadvantages?
Depending on your situation, having a trust may provide you tremendous advantages. For example, no matter how little money you have, if you are a parent of a minor child, your will should set up a testamentary trust to hold any inheritance that would otherwise pass to the minor child. Without a trust, a petition need be filed with the Orphans’ or Surrogates’ Court to appoint a trustee to manage the inheritance until the child reaches age 18.
This is an unnecessary expense that may lead to expensive litigation and an outsider managing the funds for the child. A trust would also allow you the ability to select an age when the child would gain access to the funds, rather than the default age of 18.
The best way to determine if a trust can address your unique situation and goals is to meet with an experienced estate-planning attorney. If you would like to know more, feel free to contact me for a free consultation.
More Planning Questions?
If you have more estate planning questions, please read my more detailed article, Irrevocable Trusts, Everything You Need to Know.
In Conclusion: What is a Trust.
In this article, I tried to answer the question, What is a Trust. Further, I included links to even more detailed information on my website. So, let me know how I did, comments and questions are welcome! I hope it helped!
If you have more questions about wills and estate planning, let our Irrevocable Trust Lawyers help walk you through the confusing process. Our lawyers are ready to answer your questions. Feel free to contact our office for a free consultation.
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