The Basics Of Trusts

A trust is a legal arrangement involving three parties to ensure that a person's assets are distributed to their desired beneficiaries in a manner that the individual desires. The three parties of a trust include the grantor, trustee, and beneficiary. The grantor of the trust is the creator of the trust.

The grantor puts a trustee in charge of managing and distributing the assets of the trust to the grantor's beneficiaries. The trustee has legal control of the assets within the trust, but must manage them in the best interest of the beneficiary.

Trusts are created by attorneys who draft a document called the trust agreement which dictate the terms of the trust. Trusts primarily exist as an estate planning tool and can help ensure a smooth transition process when the grantor passes his or her assets to their respective beneficiaries.

Revocable trusts can be "revoked" or changed by the owner of the trust at any time. This may include changing beneficiaries, assigning a different trustee to manage the trust, and amending any terms of the trust.

The flexibility provided by revocable trusts can be enticing to many individuals who are creating an estate plan. Additionally, revocable trusts avoid probate which can ensure a smooth transition of assets and protect your privacy as documents filed in court are public record.

However, like all legal or financial products or agreements it is just as important to be aware of the downsides as it is to be aware of the upsides. First, revocable trusts do not provide the same level of creditor protection that an irrevocable trust does.

If the owner of the trust were to be sued or have a creditor come after them, the assets inside of the revocable trust may be used to satisfy the judgment against the owner of the trust. Secondly, the assets inside of a revocable trust may be subject to estate taxes as the owner retains control of the assets within the trust.  

Irrevocable trusts differ from revocable trusts in that the owner of the trust cannot change the trust. Once the owner signs the trust agreement, the trust is set. In rare circumstances an irrevocable trust can be changed by complete consent of the beneficiaries, an order of the court, or a combination of both depending on applicable state laws.

Although irrevocable trusts do not provide the same flexibility as revocable trusts, they do provide a few benefits not found in revocable trusts. First, irrevocable trusts offer tax advantages not available in revocable trusts. When an individual sets up an irrevocable trust, they relinquish control of the assets that they transfer into the trust.

In doing so, the assets are removed from the individual's estate providing protection from estate tax. Additionally, irrevocable trusts typically provide more creditor protection than revocable trusts as the grantor of the trust gives up control of the assets inside of the trust.

A wide range of assets can be placed in a trust. These assets can include real estate, a business, stock and bond certificates, non-retirement brokerage accounts, bank accounts, annuities, safe deposit boxes, life insurance, and valuable personal property such as art or jewelry.

While this is a list of assets that can generally be placed in a trust, keep in mind that it is not an exhaustive list and that additional rules may apply depending on the asset. While it is important to understand what you can put in a trust, it is equally important to understand what you cannot put in a trust.

Assets that you cannot or typically should not place in a trust include retirement accounts such as 401k plans or Roth IRAs, cash, health savings or medical accounts, and UGMA/UTMA accounts. Again, this is a general list. Always consult an estate professional or attorney to see what you can or cannot, or should or should not put in a trust.

Whether or not you need to create a trust will depend on your individual needs. Trusts are often associated with the ultra wealthy. This is not an unreasonable association and may be the first indication that you should create a trust.

If your assets exceed the federal estate tax thresholds, which are $13.61 million for individuals and $27.22 million for married couples in 2024, creating a trust should be a priority for you. Also keep in mind that if these estate tax threshold limits drop your estate could be subject to taxes in the future even if not today which could be another reason to consider a trust.

If you do not have a significant estate, you may think that a will is sufficient. In many cases, this can be true but there still may be a few reasons to consider a trust in addition to a will. A will is essentially a set of instructions on what you would like to have happen to your assets.

The initial distinction between a trust and a will is that wills have to be validated in court through probate where trusts can avoid probate. If you want to save your loved ones the headaches and expenses of a probate process, creating a trust may be beneficial.

Additionally since trusts may avoid probate, it can protect your privacy as you avoid creating a public record in court. The other reason to consider a trust is that you can typically be more specific about how your assets are handled.

For example, if you are concerned that a beneficiary may spend their inheritance too quickly or irresponsibly, you can set rules on the way your beneficiary can access the assets of the trust. You can also use trusts to split your assets between personal and charitable beneficiaries, provide income for a special needs child, and protect your assets from creditors.

Not everyone will need a trust, but it is worth considering one even if you do not have a large estate. With that being said, creating trusts can be complicated and expensive so be sure to work with a competent estate professional to help you create a trust that meets your needs if you decide to create one.  

1) Pick the type of trust that is right for you - Revocable and irrevocable are the primary distinction between types of trusts, but many types of trusts are more specified. A spendthrift trust determines how a beneficiary is allowed to use their money.

A charitable trust donates assets inside of the trust to one or more charities. A special needs trust can be used to provide income for special needs beneficiaries. The point here is to pick a type of trust that best suits your needs.

2) Create a trust document - A trust document will detail the terms of the trust as well as allow assets to be transferred to the trust. Although there are online services that provide for DIY trust document creation, paying an attorney can be worthwhile to ensure documents are accurate and meet your specific wants.

3) Get it signed and/or notarized - Depending on your applicable state laws, signatures from you as the grantor of the trust as well as signatures from the trustee may be required. These signatures on the trust documents may also have to be notarized. Your attorney will be able to walk you through the specific requirements of your state.  

4) Transfer assets - Once you have opened a trust account and have completed all appropriate documentation, you can then transfer your assets into the trust.

The bottom line is a trust is a legal arrangement involving three parties to ensure that a person's assets are distributed to their desired beneficiaries in a manner that the individual desires. Not everyone needs a trust, but it can benefit individuals and families outside of the ultra wealthy so do not just brush them off if you are not in the 1%.

This article was written to cover the very basics of trusts, but keep in mind trusts are complex legal documents. Although there are associated costs, it is always best to work with a professional estate planner to help you create and manage a trust.