Trusts are a legal relationship in which a person (trustee) holds property for the benefit of another (beneficiary). Property is broadly defined and may include traditional investments, such as stocks and bonds, business interests or real estate.
A trust is essentially a legal contract. The parties to the contract are: the grantor who makes the property available; the trustee who has legal title and who has a fiduciary responsibility to the beneficiary; and the beneficiary who has equitable title to the trust’s property, and the right to benefit from the property. In recent years, the use of trusts in estate planning has become more prevalent.
Trusts, unlike wills, are private and not public. Assets in trust avoid probate and provide direction for the management of assets in the event of incapacity.
Trusts can be both irrevocable and revocable. An irrevocable trust, as the name implies, cannot be changed, except under certain specific circumstances. A revocable trust, also known as a living trust, an inter vivos trust, or a loving trust, can be changed at any time.
The revocable trust provides solutions for a wide variety of issues associated with estate planning that wills cannot address. If a revocable trust is funded (assets are titled into it), the grantor can stipulate provisions for the trust’s management by the successor trustee in the event of the grantor’s incompetency or death. Revocable trusts do not avoid estate tax because a power to revoke or amend a trust causes the trust to be includable in the gross estate.
Advantages of Revocable Trust:
- Privacy—wills are public and the potential for a will contest exists.
- Avoiding Probate—assets in a revocable trust are not part of the probate estate
- Incapacity Planning—provides for control of assets in the event of incapacity.
Another type of trust is testamentary. A testamentary trust does not go into effect until the grantor dies. Usually this type of trust is made within a will. A testamentary trust designates who will serve as trustee, who the beneficiaries of the trust are, and how assets are to be administered in the trust.
This type of an arrangement in a will is often used to create a trust for minors. When a trust is included in a will, the will goes into effect immediately, but the trust is not actually created until after the death of the will maker.