Trusts 101

Why do you need to know about Trusts 101? Well, a friend of mine recently retired and is living comfortably in the home she and her husband paid off a few years ago. She wants to make sure that her son can inherit the house after she passes away, so she came to me with questions about the legal documents necessary to achieve that and protect her family. When I suggested she put the house into a trust, she was confused.

“Why would I need a trust if my wishes are listed in my will?” she asked.

This is a common misconception. While a last will and testament is a legal document that can give instructions on who to give your personal property to after you pass away, it does not transfer legal title of assets like homes, real estate, and bank accounts. Only a trust can transfer ownership upon death, a will alone will require the court probate process to change title.

Trusts 101: What Is A Trust?

A trust is a legal contract that gives instructions on how to manage assets and for whom they are managed. Trusts can help you avoid the lengthy and costly probate process after you or a loved one passes away. A basic trust consists of three roles necessary for its creation, maintenance, and distribution.

First, the “trustor.” The trustor creates the trust and retitles assets in the name of the trust rather than the name of the trustor. A trust document is created by the trustor and establishes ownership rules for any assets that are put into the trust.

The second role in a trust is the “trustee.” The trustee is responsible for following through on the trustor’s wishes regarding the assets. These assets are then managed and eventually distributed by the estate to the advantage of the beneficiary.

Finally, the third role is the “beneficiary.” This is who receives the benefit of the assets after the trustor passes away. Sometimes the person who creates the trust, who manages the trust and who benefits from the trust is the same.

Trusts 101: Types Of Trusts

Trusts can be confusing because there are many different types of trusts with many different purposes and names. The most common types are revocable trusts and irrevocable trusts.

Revocable Trusts vs. Irrevocable Trusts

A “revocable trust” is a trust where the trustor, the person who created it, can change any of the terms of the trust, and even cancel it in its entirety at any point during his or her lifetime.

An “irrevocable trust” is when the trustor gives up the right to revoke or change the terms of the trust.

Many estates are created as “revocable” because the trustors are living and need to access their assets. However, after the death of the trustor, a trust becomes irrevocable. This locks in the trustor’s intent so that beneficiaries and terms of distribution cannot be changed.

Additional trusts include:

  • Digital Asset Trust
  • Pet Trust
  • Special Needs Trust
  • Dynasty / Generation-Skipping Trust (GST)
  • Gun Trust
  • IRA “Look-Through” or “See-Through” Trust

Trusts 101: Why Should I Put My Assets In A Trust?

First and foremost, putting your assets into a trust avoids probate. Many people have no desire to go through the court-supervised distribution of assets, which can be intrusive, costly, and time consuming.

Second, families with large estates can use Dynasty Trusts and IRA Look-Through Trusts as tools to help your heirs avoid unnecessary tax burdens.

Third, trusts work to protect your legacy. You maintain control over who receives your money, and the trust creates a legal framework to protect against undesirable claims from creditors even after you are gone.

If you are considering a trust as part of your estate plan, Dana and Associates is here to help you. Call our office today to schedule a free Personal Family Legal Session, where you will get to meet with an attorney about your specific estate planning needs.