Updated: Apr 19, 2019
People set up Trusts to minimize estate taxes, avoid probate, and seamlessly transfer assets to their heirs. Simply put, a Trust is a legal arrangement where property or assets are held by a third party for the benefit of one or more people.
Why would you create a Trust?
Maintain control of assets in the event of incompetence (if you become unable to manage your assets due to a decline in health or mental fitness)
Save on estate taxes
When significant amounts of assets are involved, Trusts may also be established to maintain control over assets even after the original owner has died. For example, a Trust may be set up with the sole purpose of paying college tuition for a grandchild. In this scenario, the money in the Trust can't be used for any other purpose.
What kind of trust do I need?
Trusts can accomplish a range of goals, including avoiding probate, minimizing estate taxes, and making sure your heirs receive as much of your money as possible. The type of Trust you set up will depend on what your goals are.
How do I set my trust up?
There are many online legal services that can help you create a Trust. Since Trusts can be complicated, you may want to consider working with an estate planning attorney. In addition, there are online services that offer personalized online legal advice from an attorney, which can be a more affordable option.
Online: Factors to take into consideration when choosing an online legal service include cost, completion and delivery time, and the services offered by the site. For example, some online legal services will submit your documents to review by a paralegal after completion, while others may not.
Attorney: The right Trust and estate attorney will be someone with significant experience in handling the issues you’re dealing with. Talk to friends, family members, and other attorneys to get recommendations. Always meet with the attorney you’re considering before hiring them. We prefer attorney's that charge a flat fee rather than hourly billing.
What are the main components of a trust?
Grantor: The person who creates the Trust (also known as “donor,” “settlor,” or “trustor”)
Trustee: The person, people, or entity (such as a bank) that agrees to hold the property or assets (the grantor may be the Trustee)
Principal: The property or assets themselves, including money, which is held in the Trust and managed by the Trustee
Beneficiary: The person or people who ultimately receive the property or assets in the Trust
What are the different types of Trusts?
There are many different types of Trust; depending on your goals, or the type of assets you’re trying to protect, some will better meet your needs than others.
When a Trust is created and immediately becomes effective, it is known as a “Living Trust.”
When a Trust is created and doesn't become effective until after your death, it is known as a “Testamentary Trust.” In the case of Testamentary Trusts, you, as the person creating the Trust, are called the “testator.” Testamentary Trusts are often created within Wills.
Testamentary Trusts are generally funded only after your death, often with the assets of your estate. In order to fund a Testamentary Trust, language in the Will must explicitly state that all estate assets should be moved into the Trust upon death. The estate assets can then be distributed and managed according to the terms of the Trust.
Living Trusts vs. Testamentary Trusts
All Trusts you want to create must be set up by you, the grantor, during your lifetime. However, not all Trusts immediately go into effect. Depending on when the Trust becomes effective, it is either a Living Trust or a Testamentary Trust.
You retain ownership and control of the property in the Trust and can change the terms of the Trust, including the Trustees and beneficiaries.
If you are setting up a Revocable Trust, you will likely be the sole Trustee. As the sole Trustee, you can move assets in and out of the Trust at will, without too much hassle. Because of this, many people with Revocable Living Trusts put a large portion of their assets to be held in Trust, including real estate, financial accounts (stocks, bonds, etc.), and even bank accounts.
You give ownership and control of the property in the Trust to others (Trustees) and therefore no longer own or control the property, making you unable to enact changes to the Trust.
By putting assets into an Irrevocable Trust, you're essentially giving up ownership and control of those assets, so choose these assets carefully. Which assets will be used to fund an Irrevocable Trust are generally determined by the goals of the Trust. Choosing a funding method is something you should decide with the help of a Trust and estate attorney. Transferring property to an Irrevocable Trust also requires a formal transfer of property, meaning that the property must be re-titled in the Trustee’s name. An attorney can help you complete and manage a re-titling of property.
If the primary goal of the Trust is to avoid excessive estate taxes, you'll likely want to set up an Irrevocable Trust since you don't have to pay taxes on it. If the primary goal of the Trust is to maintain control of assets in the event of incompetence, you'll likely want to set up a Revocable Trust, since you'll want to retain control over the assets in the Trust and the beneficiaries. In addition, the rules of the particular Trust you’re establishing may dictate whether a Trust must be Revocable or Irrevocable. If you’re unsure whether you want to establish a Revocable or Irrevocable Trust, you should consult a licensed Trust and estate attorney in your state.
Fun Fact (that’s not really all that fun): All Trusts are either revocable or irrevocable.
An Even Funner Tip: Living Trusts must be funded during your lifetime; Testamentary Trusts are funded after your death.
Let us know if you need help creating a legacy, protecting your assets, or minimizing your estate taxes.
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