A trust is a legal agreement in which a grantor transfers and entrusts his property to a person or corporation (the trustee) who then obtains title to the trust property. The trustee manages the property and uses it for the benefit of others (the beneficiaries).
Establishing a Trust
In establishing a trust, the grantor designates a trustee to administer the trust. The trust outlines the trustee’s duties and responsibilities and how the property should be held, invested, and distributed. While an oral trust is enforceable, it is prudent to put a trust agreement in writing. Trusts involving real estate generally must be in writing.
After creating a trust, the grantor must then transfer title of the trust property to the trust. Examples of trust property are real estate, stocks, life insurance, and bank and retirement accounts. If the trust property is real estate, a new title in the trust’s name must be recorded.
Different Types of Trusts
A trust can be revocable or irrevocable. If the trust is revocable, the grantor has the right to change the terms of the trust or revoke it. The grantor cannot do this with an irrevocable trust.
A living trust is one that is created during the lifetime of the grantor. A living trust may extend beyond the life of the grantor and is usually not subject to probate. A trustee, who can be the grantor himself or another person or corporation, administers the trust. A successor trustee is commonly named in case of the grantor’s death, incapacity, or unwillingness to continue as the trustee. While a living trust eliminates some aspect of wills, a pour-over will is used to transfer any additional assets obtained after the trust’s creation into the trust.
A testamentary trust is created within a will and as such, must comply with the statutory requirements for the creation of a will. The trust is effective upon the grantor’s death and directs a trustee to dispense the trust’s assets to the various beneficiaries. Unlike a living trust, a testamentary trust is subject to probate proceedings.
Discretionary and Spendthrift Trusts
A discretionary trust allows the trustee to use his discretion in deciding whether disbursement to a beneficiary is necessary or prudent. A spendthrift trust is a type of trust that limits a beneficiary’s access to the trust principal and may allow for only certain debts to be paid, such as rent, utilities, tuition, and the like.
One of the benefits of a trust is that the grantor maintains control over how and when a beneficiary receives an asset. For example, a trust could provide for a child’s education or distribute funds to a beneficiary only upon the beneficiary reaching a certain age. Some beneficiaries benefit by not having an entire asset distributed to them upon death, especially if he or she has difficulty managing money in general or are minors. Depending on the type of trust, estate taxes may be reduced or avoided.
A trust is a legal agreement whereby property and money can be transferred to others. While a living trust is not subject to probate proceedings, a testamentary trust, or one made in a will, must follow the rules for will creation and also go through probate.