Ever wondered what a ‘trust fund’ actually is? While the image of the rich and famous might come to mind, the reality of a legal trust is a bit more nuanced (and not always super rich). Briefly, a trust is a way to pass down assets to someone while you’re alive or after you pass. It’s like a will, but it has many more capabilities and doesn’t have to go into effect after you’ve passed. Let’s explore the real meaning of a trust, the terminology to know, who should get one, and where to start. Let’s dive in!
So…what is a trust?
A trust is a contract created by the settlor in which a trustee holds property as a fiduciary for one or more beneficiaries. In plain English? A trust is like a special agreement where someone (the trust-maker) gives their stuff to another person (the trustee) to take care of someone else (the beneficiary).
Trusts are powerful tools for managing and protecting assets in the event of one’s passing. There are several types of trust used for specific purposes. This article will touch on two specific types, revocable trusts and irrevocable trusts, and the difference between them.
Trust terminology
Before diving into the specifics of trusts, it is best to understand the basic terms:
- Settlor or Grantor: The creator(s) of the trust.
- Successor Trustee: An individual or legal entity appointed by the settlor to settle the estate after the settlor passes away. A successor trustee stands in a fiduciary role and, therefore, must follow the settlor’s instructions to the T. If they choose to take it upon themselves and make a decision going against the settlor’s directives, there are legal consequences.
- Beneficiary: An individual or entity that the settlor has named to receive assets or benefits from the trust upon the settlor’s passing.
- Property: All the assets funded into the trust, such as real estate, bank accounts, investments, and other personal property.
Who should get a trust?
The simple answer: Almost anyone with assets to their name. A common misconception is that trusts are only for the ultra-wealthy. This couldn’t be further from the truth. If you own any assets—whether it’s a house, a car, investments, or even just a substantial savings account—a trust can offer significant advantages. Trusts provide a way to manage your assets while you’re alive and ensure they’re distributed according to your wishes after you’re gone. They can also be particularly beneficial if you have minor children, as they allow you to designate a trustee to manage those assets on their behalf until they reach adulthood. Furthermore, a trust can help your loved ones avoid the often lengthy and costly probate process, saving them time, money, and stress.
How do you create a trust?
First, you will need to meet an experienced estate planning attorney. You’ll need to explain your intent and desires for the trust to the attorney. Then, they will help you determine what kind of trust is best suited for your situation.
Once a game plan has been determined, you will need to take inventory (make a list) of all your tangible and financial property. For example, real estate, bank accounts, personal items (jewelry, collectibles), etc. It is also wise to take stock of your liabilities as well. This will allow you to make informed decisions when deciding on distributions.
The next step is to establish the terms of the trust. Depending on the creator and the situation at hand, the terms may be a simple, outright lump-sum distribution to the beneficiaries, or they could be customized and tailored specifically to nuanced situations.
What is required for a valid trust?
What are the elements of a trust? Well, every state is different—what is required in California may not be the requirements in Illinois. However, there are some general requirements that are true in many states. Let’s go over what is required in California to use as an example.
Under California law, the essential elements of a trust include the settlor’s manifestation of intention to create a trust, identifiable trust property (e.g., real property, personal property), a lawful trust purpose, and an identifiable beneficiary. (Cal. Prob. Code § 15200-15205).
Do I need a lawyer to create a trust?
While technically, you *can* create a trust using DIY platforms or simply writing it down at the kitchen table, it’s highly recommended that you work with an experienced estate planning attorney. Think of it like this: You could try to fix your car’s engine yourself, but unless you’re a mechanic, you’re probably better off taking it to a professional.
Trusts, while seemingly straightforward in concept, can be complex legal documents with significant long-term implications. An estate planning attorney can make sure your trust is not only legally sound but also tailored to your specific needs and circumstances. They can advise you on the best type of trust for your situation and help you navigate the intricacies of state laws.
While using a DIY approach might seem cost-effective initially, errors in a self-created trust can lead to costly legal battles and unintended consequences down the road, ultimately costing your loved ones far more time, money, and stress.
What is the difference between the two basic trust structures: Revocable trust v. irrevocable trust?
A revocable trust is an instrument you create to manage your assets during your lifetime. A revocable trust is flexible, the settlor (i.e., trust-maker) can change and modify the trust at any point during their lifetime, so long as they are of sound mind. The day the settlor passes away, the revocable trust turns irrevocable.
An irrevocable trust is a trust that cannot be revoked by the settlor once it is created. The settlor of an irrevocable trust relinquishes all rights, title, and interest in the trust’s assets, and it does not have the ability to modify, amend, or terminate the trust. While irrevocable trusts have some benefits, such as tax benefits and protection from creditors, it is imperative to carefully determine if this type of trust is appropriate for your situation—this is where hiring an estate planning attorney comes in.
The key difference between the two types of trusts is the control and flexibility retained by the settlor.
What other types of trusts are there?
There are various types of irrevocable trusts. While it’s good to be aware of what is out there, the average person generally doesn’t need to delve into the finer details of these complex estate planning tools. For informational purposes, here are a few examples:
- Charitable Remainder Trust: This type of trust allows you to donate assets to a charity while potentially still receiving income from those assets during your lifetime or a specific amount of time and it can offer numerous tax advantages.
- Spendthrift Trust: This type of trust is meant to protect the grantor’s money from the beneficiary’s irresponsible spending habits; it restricts the beneficiary’s access to the trust assets by limiting the amount and frequency of distributions.
- Special Needs Trust: This type of trust is specifically designed for beneficiaries with disabilities, allowing them to receive financial support without jeopardizing their eligibility for government benefits.
- Asset Protection Trusts: As the name suggests, these trusts are structured to shield your assets from creditors and potential lawsuits, offering a layer of financial protection.
Each type of irrevocable trust is meant for a specific purpose, so ensuring the right trust is crucial and requires careful planning. It is encouraged that you seek guidance from a specialist.
The bottom line on trusts
Figuring out where to start with a trust can seem daunting, but it’s not too bad once you understand the basics. From grasping the terminology to recognizing the different types of trusts available, you’re now equipped with the foundational knowledge to begin your estate planning journey. Remember, a trust isn’t just for the “one percent”—it’s a powerful tool for anyone who wants to protect their assets, retain control, simplify inheritance, and gain peace of mind. The next step? Consulting with an experienced estate planning attorney. They can provide you with legal guidance, helping you create a trust that reflects your circumstances and achieves your specific goals. So, take the plunge and explore the possibilities—your future self will thank you.
Chelsie Keller is an accomplished attorney with broad experience in Estate Planning, Civil and Criminal Litigation.
Chelsie is very passionate about helping couples and families navigate the waters of life’s most important issues. She provides a confident, compassionate, and steady hand, helping guide clients throughout every step of the planning process, whether it’s estate planning or embarking on a new marital journey.
Chelsie’s goal at the end of the day is for her client’s to walk away feeling comfortable and confident with their decision.
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