A Trust is a useful and flexible tool for estate planning. If properly drawn and executed, it can avoid probate and allow you to keep your estate matters private.
A Trust is an artificial entity created by a document or an instrument. A Trust requires four basic elements: trustee, trust property, trust document, and beneficiaries which are known or can be identified. The trust document lays out the guidelines of operation for the Trust, what powers the trustee has or does not have, what the beneficiaries are to receive, and how the beneficiaries are to receive the trust property. A Trust is created through a legal document called a trust agreement. This document contains the directions regarding management of the trust assets, how the assets are to be distributed from the Trust, and instructions of what happens to the Trust when the person who creates it becomes incompetent or dies. This may mean distribution of the assets in Trust to the beneficiaries and termination of the Trust. Beneficiaries who are named in the trust agreement may be the person establishing the Trust, the spouse, relatives, friends, churches and charities. In order for a Trust to fulfill its purpose, it must be funded. Sometimes individuals do not take this step after executing the paperwork necessary to establish the Trust. By failing to complete the funding of the Trust, the purpose for which it was designed cannot be accomplished. Types of property that one can put into a Trust could be cash, personal property or real estate. The affairs of the Trust and its assets are managed by trustee who is guided by the instructions and directives contained in the trust agreement. The trustee can be either a person (including the one who sets up the trust), another family member, friend, corporate entity (such as a bank or trust company), or a combination of any of these. The trustee has a duty to maintain a high degree of responsibility. The trustee cannot make risky, speculative investments which do not conform to the directions set forth in the trust agreement. Trustee’s duties include receipt and management of trust assets, collection of income generated by the assets, accounting and tax reporting, investment and income distribution all according to the trust document. There are two main types of Trusts: living or testamentary. A living trust is established by a living person, while a testamentary trust is established in a person’s Will and comes into being at the time of death under the circumstances set forth in the Will.
There are two main types of living trusts: revocable and irrevocable. A revocable trust allows the person creating it to alter, amend or terminate the Trust and take back the property. Usually the person creating the Trust receives income during their remaining life with distributions to a spouse, children, grandchildren or some other beneficiary at death. An irrevocable trust once funded cannot be altered amended or terminated by the person creating it. Once the property is transferred into the Trust without retention of any kind of power over that property, the person creating the Trust can no longer regain ownership of that property. This type of Trust is rarely used because of the loss of control over your property. It is a useful Trust, however, for high wealth individuals who need to reduce or eliminate inheritance and estate taxes. There are other types of Trusts which serve various purposes. It is important in creating a Trust that you discuss all aspects of your goals so that the correct Trust can be created for you.