What Is A Trust?

What Is A Trust?

When people hear the word “trust,” they often imagine billionaires with a squadron of accountants and attorneys at their beck and call. And at one time, trusts were used primarily by very wealthy families. But those days are gone. Estate planning attorneys now use trusts as a way to help people in a variety of situations. Regardless of how many assets you own, a trust can help you protect them.

To see why trusts can be useful in so many different circumstances, it is important to understand how they work. In this post, we’ll take a look at the way trusts operate and how they are used.

A Trust is a Legal Container

Trusts are artificial legal creations set up to hold property. They are intangible, like an account, but they are much broader than an account—trusts can be used to hold accounts. Many people find it helpful to think of a trust as an invisible bucket that can hold all types of property. It is a legal container.

You put property into a trust to make it easier to manage and to protect it. Some types of trusts are like an open bucket—you can take property out easily. But like an open bucket, these types of trusts don’t offer as much protection for the assets inside. Other types of trusts are like a deposit box at a bank—once you put something inside, only certain people have the key to take it out. These trusts are less flexible, but they offer a great deal more protection.

Understanding the Roles within a Trust

A trust operates on the fundamental principle of dividing ownership of assets for the purpose of management and protection. There are three critical roles involved:

  • Grantor – The grantor is the person who creates the trust and contributes property to it. They decide the purpose of the trust, the terms under which it will operate, and who the beneficiaries will be. In some cases, particularly with revocable living trusts, the grantor may also serve as the trustee and beneficiary during their lifetime.
  • Trustee – The trustee is appointed by the grantor to manage the trust’s assets. The trustee has a fiduciary duty, which means they are legally obliged to manage the trust in the best interest of the beneficiaries, according to the terms of the trust document. They have control over the trust’s assets and are responsible for their distribution according to the grantor’s instructions.
  • Beneficiary – The beneficiary is the person or entity that benefits from the trust. Beneficiaries can receive income, principal, or both from the trust, depending on the terms established by the grantor. They do not control the assets in the trust; that responsibility lies solely with the trustee.

This separation of roles and responsibilities is crucial for a trust to function effectively, ensuring that the assets are managed and distributed in a manner that aligns with the grantor’s intentions and provides protection and benefits to the beneficiaries.

Managing and Enjoying Property Through a Trust

When property is placed into a trust, its management and enjoyment are neatly separated to ensure that the property is used wisely and according to the creator’s wishes. Here’s a simplified breakdown of how this works:

  • Control Without Personal Benefit: The trustee, who is in charge of the trust, oversees the property and decides how to manage it. This might involve selling assets, investing funds, or using property to generate income. However, the trustee cannot benefit personally from these actions; they must always prioritize the interests of the beneficiary.
  • Benefit Without Burden: The beneficiaries are the ones who enjoy the property or income from the trust. They benefit from the assets without having to manage them or make tough decisions on investments or sales. This is especially useful if the beneficiary is not experienced in financial matters or is too young to handle property responsibly.
  • Guidance by Trust Terms: The specific instructions laid out in the trust document by the grantor—who originally put the property into the trust—guide how the trustee should distribute the assets to the beneficiaries. These terms are tailored to the unique needs of the beneficiary and can cover anything from education expenses to basic living costs.

This structure aims to protect the property within the trust and ensures that it serves a beneficial purpose for the intended parties, without the common risks or burdens that come with direct ownership.

Revocable Living Trusts Help Families Avoid Probate

One of the most popular types of trust is a revocable living trust, which is very flexible, like the open bucket mentioned earlier. You can put property in and take it out easily. Usually, people who set up these trusts also serve as their own trustee and beneficiary, so they can use and control their property just the same as they did before they moved it into a trust. 

Why go to all this trouble? The main benefit of moving assets into a revocable trust is that when you pass away, the property in the trust does not have to go through a long, costly probate process. Instead, it passes directly to loved ones who you have designated as your alternate beneficiaries.

Irrevocable Trusts Protect Assets  

The trusts that operate more like a bank deposit box are irrevocable trusts. Once you create this type of trust, it is hard to change, and you cannot remove property once you place it inside. The trustee uses the property in the trust according to the directions you established in the trust agreement. For instance, if the trust is set up to pay for your granddaughter’s education, the trustee might pay for tuition and other school expenses.

Because the trust technically owns the property, creditors of the beneficiary or the trust creator cannot access the property. It is also not counted against the trust creator or the beneficiary for purposes such as establishing eligibility for Medicaid benefits, so a trust is helpful for someone with special needs or an older individual who wants to receive long-term care benefits through Medicaid. Trusts can also protect assets from tax liability.

Talk to Inhulsen Law About How a Trust Could Benefit Your Family

Trusts can accomplish a wide variety of purposes, but you need a different type of trust for each goal and you need to understand how it operates to take full advantage of the benefits. At Inhulsen Law, we can review the benefits and potential drawbacks and help you determine whether a trust is a good choice for your situation.

Contact Inhulsen Law today to schedule an initial consultation. You can either fill out our online form or call us at (616) 747-0000. We look forward to helping protect your interests. 

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