Trusts

What Is a Trust?

A trust is a legal arrangement in which the person creating the trust (known as the grantor, trustor, or settlor—all of which mean the same thing) transfers property to another party (known as the trustee), who then holds and manages the property for the benefit of another person or group of people, known as the beneficiaries. The rules by which the trust is governed, including how the assets are to be managed and distributed, are outlined in a document called the trust agreement. It is important to note that with most trusts, the grantor is also the initial trustee and primary beneficiary of the trust.

Trusts are extremely useful tools that can provide flexibility and control over the management and distribution of assets both during the grantor's lifetime and after the grantor’s passing. Key elements of a trust include:

Grantor/Trustor/Settlor: The individual who establishes the trust and transfers assets into it.
Trustee: The person or entity responsible for managing the trust assets according to the terms specified in the trust agreement.
Beneficiaries: Individuals or entities that benefit from the trust. They may receive income generated by the trust assets or the assets themselves, depending on the trust's terms.
Trust Property or Assets: The assets, property, or funds transferred into the trust by the grantor for the benefit of the beneficiaries (also known as the “trust estate,” among other terms). Without trust assets, there is no trust.
Trust Terms: The written provisions that govern the trust's functioning and allow it to accomplish the goals for which it was created.

Trusts can serve various purposes, including (but not limited to):

Avoiding Probate: Assets in a trust are not considered part of the grantor's probate estate, so they can be transferred without the need for a probate proceeding.
Protecting Children and Spouses in a Blended Family: Spouses in a second or third (etc.) marriage often don’t realize that without proper estate planning, they run the very real risk that their children will end up unintentionally disinherited, or with a much smaller share of their estate than expected. A trust allows a spouse to not only ensure that their children receive the correct share of their estate, but also to provide for their surviving spouse should there be one.
Tailoring Asset Distribution: An estate that passes through intestacy or pursuant to a will goes straight to the beneficiaries/heirs once the estate closes. With a trust, however, assets can be distributed to beneficiaries over time as directed in the trust agreement. This is especially beneficial when a lump sum inheritance might be wasted by, or harmful to, an irresponsible beneficiary. Some of the more common examples of this include beneficiaries who have a spending problem, substance abuse or gambling issues, a marriage that is likely to end in divorce, or creditor issues. And some beneficiaries are simply too young.
Avoiding Guardianship: Guardianship is something you want to avoid if possible. A trust (along with other estate planning documents like powers of attorney) is a great way to do that.
Asset Protection: The right kind of trust can shield assets from creditors or lawsuits. Trusts can be created to protect a grantor’s assets for his/her own use, or to protect assets that are going to someone else.
Charitable Giving: Specialty charitable trusts can be used to support charitable causes while also providing potential tax benefits.
Special Needs Planning: An inheritance or gift of assets can sometimes cause individuals with disabilities to lose their government assistance. A special needs trust can be used to benefit these individuals without jeopardizing their government benefits.
Privacy: Trusts can offer a level of privacy in estate planning that isn’t possible with a will alone, as trusts generally are not subject to public probate proceedings.

There are many different types of trusts, each designed to achieve specific goals, and the terms of a trust can be customized to meet the unique needs of the grantor and the beneficiaries. Choosing the right kind of trust requires an evaluation of your specific goals, financial situation, and needs. The following are some of the more common types of trusts:

Revocable Living Trust

By far the most common type of trust, it can be modified or revoked at any time by the grantor.
Primary purposes: The most common purposes for this trust are to avoid probate and tailor distributions to beneficiaries, but it can also be used to (among other things) avoid guardianship and provide an asset-protected inheritance to beneficiaries other than the grantor.

Irrevocable Trusts

There are several types of irrevocable trusts, and they are generally specialized in purpose and more complex than revocable trusts. Irrevocable trusts, as their name suggests, cannot be revoked or modified like a revocable living trust can. That’s not to say that nothing can be done if something needs to be changed with an irrevocable trust, but it’s much more difficult, and some changes are impossible.
Primary purposes: Asset protection, reducing estate taxes, and maintaining eligibility for certain government benefits.

Asset Protection Trust

Asset protection trusts are a type of irrevocable trust used to—you guessed it—protect assets from creditors, the idea being that “if you don't own it, it can't be taken away from you.” With the most straightforward asset protection trusts, assets are placed in trust for the benefit of family members or others, and then are kept out of reach of the creditors of those beneficiaries. It gets a little more difficult, though, when one wants to put assets in a trust to be protected from their own creditors. Traditionally this simply wasn't possible, until the Cook Islands and a handful of other small countries changed their trust laws to allow it, and the offshore asset protection trust was born. A while later, Alaska enacted its own laws allowing "self-settled" asset protection trusts, and several other states followed suit—including Nevada and Utah.

Charitable Trusts

Charitable Remainder Trust (CRT)

Provides an income stream to the donor or beneficiaries, with the remainder going to a charitable organization.
Primary purposes: Potential income tax deductions for the donor and reduced estate taxes.

Charitable Lead Trust (CLT)

Provides income to a charitable organization for a specified period, with the remainder going to non-charitable beneficiaries.
Primary purposes: Potential income tax deductions for the donor and reduced estate taxes.

Special Needs Trust

Primary purpose: To provide for the financial needs of a person with disabilities without disqualifying them from government assistance programs.

Consulting with competent legal counsel is the best way to determine the most suitable type of trust(s) to fit for your specific needs, circumstances, and goals. We would be happy to help you understand the benefits and implications of each type of trust and guide you through the process of establishing and managing it.