Introduction to Trusts: Understanding the Basics and Benefits

Introduction to Trusts: Understanding the Basics and Benefits

Estate planning attorneys use trusts to accomplish a surprising variety of goals for people in all types of circumstances. But even though these estate planning tools are becoming increasingly popular, many people still do not understand what they are, how they work, and the benefits they can provide. That’s not surprising, because trusts are artificial intangible legal creations and for a long time, they were primarily used only by the very wealthy.

However, nearly every family could benefit from one or more types of trusts, so it is a good idea to understand the basics about their operation so you can decide whether to consider creating one to protect your interests and further your goals.

A Trust is a Virtual Container

While trusts are often thought of as a type of an account, they are actually a virtual container. Trusts can hold accounts and all other types of property as well. Some attorneys describe them as a bucket or candy jar. Trusts can be strong, inflexible, and hard to open, like a bank deposit box, or they can be flexible and easy to open like a plastic bag. The properties of the trust will depend on the purpose you want it to accomplish. Often a trust will need to be set up a certain way to meet the requirements of specific statutes.

Trusts start out empty, so you need to take steps to transfer property into the trust. Once you do that, the trust technically owns the property and your ability to control that property or remove it will depend on the terms set up in the trust document.

Trusts Split the Ownership of Property into Three Components

When you put property into a trust, you split up the aspects of ownership. The person who created the trust and puts property into it is sometimes known as the grantor or trustmaker, but it is often easiest to think of them as the creator. They give up control and ownership of the property. Control goes to someone known as the trustee. While trustees control property in trusts, they don’t use that property for their own benefit. They have a fiduciary duty to protect the value of the property and act in accordance with the best interests of the trust. Trustees are obligated to serve the beneficiaries, who are the ones who ultimately receive the use and benefits of the assets.

As an example, a parent might set up a special needs trust to provide long-term support for a child with special needs who will always require assistance. The parent would be the grantor and the child would be the beneficiary. The grantor might choose someone in the family to serve as trustee, but because the obligation would be of long duration and require complying with federal rules to maintain the beneficiary’s eligibility for government benefits, the grantor might instead use a professional trustee.

Revocable vs. Irrevocable Trusts

The biggest differences between various types of trusts hinge on whether the trust is revocable or irrevocable. Revocable trusts can be changed or cancelled easily. When someone puts property into a revocable trust, they can remove it if they change their mind. This type of trust is used most often to avoid probate. The trust creator puts their property into the trust and then serves as the primary trustee and primary beneficiary so they can control and use the property just as they did before it was put into the trust. When they pass away the trust becomes irrevocable, an alternate trustee takes over management of the trust, and the new trustee pays final bills and distributes property to the alternate beneficiaries. This is similar to what happens when property is left through a will, but with a trust there is no need to go through the formalities of probate, which saves considerable time, money, and headaches.

Irrevocable trusts are not as flexible, but for that reason they provide protection to the assets placed in the trust. Once a grantor moves property into an irrevocable trust, they cannot take it out or control it. Instead, the trustee must use that property for the purpose of the trust. Because property in an irrevocable trust belongs to the trust rather than the grantor or the beneficiary, creditors cannot take the property. A trust can provide a way to protect assets from lawsuits or to help someone who has trouble managing money. Keeping property in an irrevocable trust can also reduce tax liability and help grantors and beneficiaries qualify for public benefits such as Medicaid.

Find Out How a Trust Could Help Meet Your Needs

At Inhulsen Law, we create trusts for many purposes, but we know that a trust is not the solution to every situation. If you’d like to learn more about the benefits a trust could provide you, we would be happy to discuss your needs and potential trust arrangements to fit your goals, as well as alternative options.

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