A Trust is a great estate planning tool that avoids probate when passing property, money, or other assets to a loved one upon your passing. Various components make up a Trust and we’re going to break down those different parts to help you understand exactly how a Trust works.
What is a Trust?
In basic terms, a Trust is a three-person legal financial arrangement to hold and manage assets for the benefit of the person named as the beneficiary. It is not subject to the lengthy and costly probate process. When the creator of the Trust dies, the trustee who oversees the Trust will transfer the assets directly to the named beneficiary per the terms of the trust.
Related Article: Why You Should Consider a Trust
Let’s say you want to leave your home to your daughter when you die. You can establish a Trust and retitle the home (fill out a new deed) naming the Trust as the owner and naming your daughter as the beneficiary.
Depending on the type of Trust – there are more than one, we’ll get to that in a bit – either you serve as the trustee, or the person appointed as the trustee, has the authority to manage the home in the Trust. After you pass, the home gets conveyed to your daughter.
Different Parts of a Trust
A Trust has five main parts: the grantor, assets, trustee, the beneficiary, and terms. Here’s a drill down of each:
- Grantor – Also called the trustor or settlor, the grantor is the creator of the Trust. It can be an individual, a couple, a company, or an organization. A person must be at least 18 years of age and of sound mind to establish a Trust. The grantor can provide certain terms and conditions of how the Trust is managed and assets distributed upon his or her passing.
- Assets – These can be a home, money, stocks, a car, investment accounts – something that is of monetary value. In the case of valuables or items that have no ownership title, a schedule would be completed listing those items to be filed with the Trust. When it comes to digital assets like cryptocurrency or social media accounts, the grantor can place these in a Trust and name the beneficiary to receive them along with a notation there is a separate document with access details.
- Trustee – This is the person who has the fiduciary responsibility for managing and overseeing the Trust and carrying out the terms set by the grantor. The Trust is the legal owner of the assets and the trustee must file any required taxes and accounting paperwork and keep track of any income generated. The trustee is required to be prudent with investing assets, meaning that any investment cannot be speculative. Above all, the beneficiary’s best interests must always be considered. When the grantor dies, it is the role of the trustee to distribute the assets in accordance with the grantor’s instructions as spelled out in the document.
- Beneficiary – This is the named person, persons, charity, or organization that is to receive the assets in the Trust when the grantor passes. It can even be a minor child, where instructions would be included as to what age and circumstances the assets would be transferred.
- Terms – These are the wishes of the grantor as to how the Trust will be managed. The best thing about a Trust is that it can be customized to the needs of the grantor and his or her loved ones. The grantor must clearly state the conditions and instructions that will guide the trustee as to how they want the assets distributed.
Related Article – Funding Your Trust
Types of Trusts
There are several Trusts for various purposes:
- Living Revocable Trust – The grantor establishes this Trust while still alive and can amend or revoke it at any time. Also, the grantor often serves as the trustee, overseeing and managing the assets during his/her lifetime. A successor trustee must be named to take over when the grantor passes or becomes incapacitated. This Trust is not sheltered from taxes or creditors since the assets are still considered part of the grantor’s estate and the grantor actually still controls the assets through the Trust. The grantor can earn any income from the assets like dividends or interest and must pay taxes on that income.
Related Article: The Tax Implications of Creating a Trust
- Irrevocable Trust – This Trust cannot be changed or revoked once it is created. The grantor relinquishes ownership of assets once they are placed in this Trust, which in turn protects them from creditors and most taxes. Also, the grantor cannot serve as a trustee and the appointed trustee has full management authority. The grantor cannot sell any assets nor earn any income from them.
- Pet Trust – Funds can be set aside to ensure the care of your pet when you can no longer care for it. Instructions can be included regarding your wishes for how your pet will be cared for.
Related Article: Why Do I Need a Trust for My Pet?
- Special Needs Trust – This provides financial support for a special needs person without affecting their eligibility to receive government benefits.
Related Article: Estate Planning for Special Needs Children
- Credit Shelter Trust – This is generally established by wealthy individuals to protect an estate from the estate tax. As of 2022, the federal estate tax exclusion is $12.06 million. Unless Congress extends the exclusion, it is scheduled to drop to $5.49 million in 2025.
Benefits of a Trust
In addition to avoiding the probate process, another big advantage of a Trust is that it gives you greater control over the assets while you are living and allows you to dictate when and how the assets should be distributed to your beneficiary after you die.
Related Article: 8 Reasons You Might Need a Trust
Suppose your son or daughter isn’t very good at handling money. You may still want them to inherit from the Trust upon your passing, but you probably wouldn’t want to leave them a large lump sum. In this scenario, you can provide instructions for the trustee to distribute specific amounts over a set period of time.
Another benefit of a Trust is privacy. When a Will goes through probate, it becomes a public document to notify beneficiaries, potential creditors, and anyone that may have a claim against the decedent’s estate. Since a Trust does not go through probate, it remains a private legal document.
Trusts versus Wills
A Trust and Will are similar in the end result: transferring assets to a beneficiary upon the death of the document’s creator. But that’s where the similarity ends. The main difference between a Will and a Trust is, as mentioned: probate. A Will must go through probate. A Trust does not. By circumventing probate, the beneficiary can receive the assets seamlessly and quickly, and typically without legal challenges.
Be aware that assets placed in a Trust must be retitled to the ownership of the Trust. An asset not titled as owned by the Trust will go to probate. This is where a Pour-over Will would come into play to capture any assets you did not place in the Trust while you were alive and transfer them into your Trust after you die.
Why Do I Need a Pour-Over Will?
A Pour-over Will works in conjunction with a Living Revocable Trust to ensure that, upon your passing, any remaining assets in your estate you did not place in your Trust, “pour” into the Trust.
In the time since you created your Trust, you may have acquired new assets you did not put into it. Or there may be an asset you just didn’t think about placing in the Trust. When you die, the Pour-over Will kicks in to take those assets in limbo and redirect them into the Trust. These assets, however, must go through probate.
You’ll need to name an executor of the Pour-over Will – this person could be the Trust’s trustee. Also, you need to name your trust as the residual beneficiary to inherit the remaining assets. The assets are then distributed to the named beneficiaries in the Trust.
To avoid any issues, it is always a good idea to periodically review and update your Trust and all your estate planning documents and make changes as your life changes.
Create Your Trust with Gentreo
We can help you create your Trust and online estate plan to meet your specific needs. We have coaches that will assist you in customizing your Trust and guide you through the process. If you have any legal questions, turn to our partnered licensed estate planning attorneys in all 50 states for state-specific advice. Need a place to store your estate plan and other important documents where you can quickly access them 24/7? We can help with that too with the Gentreo Digital Family Vault.