What is a Trust?
A. What Exactly is a Trust?
A trust is a legal relationship between at least two people regarding some type of property, where one person is holding the property for the benefit of another person.
A trust is not a legal entity, but you can think of a trust being like a business, with the trustee as the only employee (usually), and is managing the trust assets for the benefit of a shareholder (the beneficiary).
In many cases, the operations of the trust (the trustee's duties) are very similar to how a small business would operate, with some very notable exceptions which are outside the scope of this article. The greater the number of assets and the more complex the assets are will result in a trust functioning much more like a business than simply a relationship with property.
For purposes of estate planning, a trust is an important estate planning tool used to avoid probate, minimize an estate's exposure to estate taxes, and to preserve assets for passing to intended beneficiaries, among other benefits.
B. What Types of Trusts are There?
There are many types of trusts available and most are identified by their purpose or features, such as a revocable living trust, an irrevocable life insurance trust, charitable trusts, testamentary trusts, and a variety of others.
Most people generally have a revocable living trust, which is revocable during their lifetime, but will become irrevocable upon their death.
C. What is the Difference Between a Revocable Trust and an Irrevocable Trust?
A revocable trust is one in which the trustor can revoke the established trust, in whole or in part. This provides a more flexible option to alter provisions or to move property around in the future if circumstances change. This is the most common type of trust for the average person looking to reduce the post-death administration costs and pass their assets on to beneficiaries.
An irrevocable trust is one in which the trustor cannot revoke the trust. In most cases, the terms are not modified in the future, and the trustor may not reclaim the property once placed into the trust without creating other issues. These types of trusts are most commonly utilized for asset protection or for tax purposes. Modification of these types of trusts is much more difficult, if it's even possible at all.
Some trusts, such as the ordinary revocable living trust, is both revocable and irrevocable. It just depends on when you are examining the trust. If you are examining the trust while the settlor is alive, then it is likely revocable, while if you are examining the trust after the settlor's death, it is likely irrevocable.
An important distinction and common misconception is that just because a trust is irrevocable does not mean that it cannot be modified (amended). For most revocable living trusts, however, they cannot usually be modified after the trustor's death.
D. What is the Difference Between a Trustor, Trustee, and Beneficiary?
A trustor, also referred to as a settlor, trustmaker, or originator, is the person who establishes the trust. This could be one or more people or entities.
A trustee is the person who manages the assets that are held in trust. This can be one or more people, but is often limited to, at most, two people. The trustee is the person that holds title to trust assets and holds the assets for the benefit of the beneficiary. This role comes with various fiduciary obligations and disclosure requirements.
A beneficiary is any person who would receive the benefits of the assets held in trust by a trustee. Over the course of a trust administration, the beneficiaries may change based on certain conditions that occur (i.e., the death of another person).
For revocable living trusts, these people are typically all the same person while the trustor is alive and has capacity. Over time, the trustee and beneficiary may change, but the trustor would stay the same.
E. What is a Revocable Living Trust?
A revocable living trust is one which is established by one or more persons which is revocable and amendable while all of them are alive. Beyond this, the terms may vary depending on the circumstances.
For a single person, this type of trust is designed to be held, for the benefit of another, by the trustee during the trustor's lifetime. Upon that person's death, the trust becomes irrevocable and cannot be further amended, and the assets are subsequently distributed as designated by the trustor in the trust.
For a married couple, it is essentially the same process, except that upon the death of one spouse, the terms vary depending on the circumstances. The options are (A) all of the assets are distributed to the surviving spouse (or to a subtrust with the surviving spouse's full control) and the surviving spouse can amend or revoke that subtrust in its entirety, (B) none of the assets are distributed to the surviving spouse (or no assets are distributed to a subtrust under the surviving spouse's control) and is not subject to amendment or revocation by the surviving spouse, or (C) there is some split of assets partially under option A and partially under option C.
For some married couples and for unmarried couples, it might make sense to set up separate trusts to be administered. This is very common with blended families, or when each spouse has substantial separate assets.
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