For someone with one or more businesses, real property, or personal property, trusts can be a valuable tool. So, what is a trust? A trust is an estate planning tool used to manage your assets during life, after death, and to replace [or supplement] a will. Most importantly, they help shield property. And for this reason, trusts are a popular estate planning tool. So here is everything you need to know about the basics of trust.
Creating a Trust
In order to create a trust, you need:
- A person who owns the property that will be held in trust (aka the “trustor,” “grantor,” or “settler”),
- Someone to which legal ownership of the property will be transferred (aka the “trustee”), and
- Someone for whose benefit the trustee will manage the trust (referred to as the “beneficiary”).
A grantor may act as both a grantor and a trustee in a trust. However, such a grantor would still owe a fiduciary duty to the beneficiaries just like any other trustee would. The grantor may also be a beneficiary, so a trust may have the same grantor, trustee, and beneficiary. Yet, no matter how many positions the grantor holds [in a trust], the trust is not effective until the property is transferred. Specifically, from the grantor to the trustee.
There is a fiduciary relationship between the trustee and the beneficiary. In other words, the trustee must act solely for the benefit of the beneficiary when managing the “trust’s” property. The trustee holds legal accountability to the beneficiary for any damage to his or her interests due to the trustee’s actions in managing the trust. And even oftentimes compensated for their management role over the trust.
Testamentary and Living Trusts
Trusts are classified into two, overall, broad categories. These categories are testamentary trusts and living trusts. A testamentary trust allows the transfer of property into a trust after death. Whereas property transferred during one’s lifetime is a living trust.
A testamentary trust is typically provided for in a will. And does not get created until the grantor is deceased. Testamentary trusts allow you to spread out or delay the benefits of the trust over a period of time. As opposed to one lump sum immediate benefit [or gift] upon the grantor’s death. An example of a testamentary trust would be when a minor has an inheritance managed by a trustee. The idea behind the testamentary trust is that it reinforces the goals and preferences of the grantor after their death.
As opposed to testamentary trusts, grantors create living trusts during their lifetime. And it may also continue after death. Property held by a living trust generally does not go through the probate process before going to the beneficiaries. Unlike a testamentary trust where the property does have to go through the probate process.
Irrevocable and Revocable Trusts
A living trust may be either an irrevocable trust or a revocable trust. As the name suggests, the difference between the two revolves around revocation (aka the ability to repeal or cancel). A revocable trust allows the grantor the ability to revoke the terms of the trust even once the property has been transferred.
The grantor has the ability to revoke the terms of the trust. Even after the grantor creates the revocable trust and transfers property to the trustee. However, a grantor of an irrevocable trust waives their right to change the trust terms. Typically, someone creates a revocable trust to enhance a will, but they often become irrevocable after the grantor dies.
Basics of Creating a Trust
Although the focus here is on the basics of creating a trust for the purpose of supplementing a will, trusts go far beyond the information provided here. Additionally, trusts are also a great tool for protecting property from creditors and other liabilities. Making trusts especially ideal for someone with valuable personal property, real property, and/or their own business.
Do you own a business, personal or real property that needs protecting and missing a trust in your estate plan? Our attorneys at Dodson Legal Group counsel clients on which trust is a right for them based on their preferences, goals, and wishes. Contact us at 844-4DODSON for a free, no-obligation consultation with an attorney to discuss what trust is best for you.
Check out these 13 Estate Planning Terms You Need to Know