A trust is an agreement that establishes a relationship between a trustor, sometimes called the grantor and a trustee. The grantor gives the trustee some assets or properties to hold until they are transferred to the final beneficiary.
Trusts are used for a variety of reasons. Most commonly trusts provide legal protection for the grantor’s assets, ensure proper division of assets upon the grantor’s death, reduce paperwork associated with the transfer of property, and serve as a method by which to avoid taxation of estates and inheritance.
Grantors secure the assets and transfer them to the trustee to manage. Trustees are required to act as fiduciaries for the assets that they hold until the time to transfer the assets to a beneficiary arrives. The beneficiary receives the trust when certain circumstances are met, such as the death of the grantor, the achievement of a certain age, or the commencement of an event such as beginning college or getting married.
While trusts are incredibly versatile, they are not free. They take time and money to create and maintain. Additionally, once a trust is established, it can be difficult to adjust or terminate depending on the terms of the original trust document.
Trusts are an extremely flexible financial entity. Depending on the needs of the grantor they can be written with a number of restrictions or liberties. In general there are three binary decisions that will be made about the formation of a trust: is it living or testamentary, is it revocable or non-revocable, and is it funded or unfunded?
Living Trusts vs. Testamentary Trusts
In general, a trust is either a living trust or a testamentary trust. A living trust places the grantor’s assets into a trust but also allows the grantor to use those assets during their lifetime before passing on to the final beneficiary. This allows the grantor a degree of control over the assets in the trust until they pass away. The downside of this is that the assets in a living trust are counted in the taxable estate of the grantor’s estate, negating the tax benefits of a trust.
By contrast, a testamentary trust is established with in the last will and testament of the grantor. This allows the assets in the trust to take full advantage of any tax exemptions and allows specific assets to pass to the beneficiaries. The downsides of a testamentary trust is that it is not easily altered and since it is part of the will it must pass through the probate process, potentially delaying the receipt of the assets in the trust.
Revocable Trusts vs. Irrevocable Trusts
The second major binary of trusts is whether they are revocable or not. A revocable trust, such as an AB trust, can be changed or even terminated by the grantor up until the time of the grantor’s death or incapacitation. This allows the grantor a great degree of freedom in how they would like the assets in the trust to be managed.
By contrast, an irrevocable trust is set in stone once it has been created. The advantage to these trusts is that they cannot be altered by the grantor and are therefore not included in the taxable estate of the grantor. An example of a irrevocable trust would be a QTIP trust, which establishes a permanent life estate for a surviving spouse when the grantor dies while still ensuring that the assets in the trust eventually pass to the grantor’s children.
Funded Trusts vs. Unfunded Trusts
The final question about trusts is whether they are funded or unfunded. Simply put, a funded trust holds assets of the grantor while the grantor is still alive while an unfunded trust is simply the promise that the trust will be funded.
An unfunded trust may have a number of triggers that cause it to become funded including the death of the grantor, the achievement of a certain accomplishment, or any other trigger that is written into the trust document. If an unfunded trust remains unfunded, it will dissolve.
If you want to store assets in a secure and effective trust, you will need the help of a trusts & estates attorney. An experienced trusts & estates attorney can consult with you about the type of assets, the circumstances of distribution, and the intended beneficiaries, in order to ensure that you choose the correct type of trust.
Once you have determined the type of trust you would like to establish, your trusts & estates attorney will work diligently to ensure that the trust is secure from excess taxation and as much of the trust as possible makes its way to your beneficiaries intact.
