What is a Trust

A trust is a legal document that puts assets in the hands of a trustee with instructions about how to manage and distribute those assets. Trusts are an important element of many families' estate planning. Unlike a will, which simply identifies who receives your assets, a trust gives you the ability to tailor your plan to your specific wishes and family needs.

Below are some of the most common types of trusts and how you might use them in your planning.

Revocable Trust

"Revocable" means you can change your mind. Because you can change your mind, this document is not useful for asset protection or minimizing estate taxes. But it still can be very helpful.

A revocable trust can help you avoid probate if you put assets into it during your lifetime. Anything in the trust at the time of your death will be distributed through it and will not have to go through probate. These are also sometimes called living trusts.

If you are married with young children, you might want to make sure that certain assets are preserved for your children. At the same time, you want to make sure your surviving spouse is taken care of. You can use a trust to provide income to your spouse during his or her lifetime with the underlying asset going to your children eventually. This is particularly useful tool when you are dealing with real estate or interest in a family business.

A revocable trust can also be used to control when your children come into their inheritance. You might direct the trustee to distribute assets when they reach a certain age, or achieve a certain milestone like graduating from college. This gives you some ability to ensure that they are able to handle the assets when they come into full control of them.

Revocable vs. Irrevocable Trusts

The decision about whether to create a trust that is revocable or irrevocable depends on your goals. If you are trying to protect assets from the costs of long term care, or to minimize estate taxes, you should consider an irrevocable trust. You can also consider a tax free gifting strategy if you need to move assets out of your estate. Read more about asset protection in estate planning.

The key difference is that you cannot change your mind with an irrevocable trust. This means before you go down that road, you need to be sure that you can live comfortably without full access to those assets.

Testamentary Trust

A testamentary trust is one you create in your will. This will not help you avoid probate or allow you to transfer assets prior to death. It can, however, meet the need for someone to hold and manage assets for your children if they inherit while minors.

Because this only comes in to being when your will is probated, it is in one sense irrevocable.  However, you always have the ability to change your will, so if you change your mind you can still change this during your lifetime.

Funding the Trust

If you create a living trust, you can either put assets into it during your lifetime or direct that assets pass through your will. Anything you put in during your lifetime will pass outside of probate. Unless you specifically request this service from your estate planning lawyer or someone else, it is usually up to you to actually put assets in the trust.

If you are going to transfer bank accounts or investment accounts, you will most likely need to get a tax identification number for the trust. Your lawyer can do this for you if requested, but the process is a very simple online application.

Naming a Trustee

The person you choose as a trustee will have to follow the guidance you provide in the document, but generally has a fair amount of discretion in how he or she manages the assets.

You can serve as the initial trustee, with a successor trustee named in the event of your death or disability. You need to be careful that the successor trustee is not also the sole beneficiary. A trustee is often a family member who could also be a beneficiary. You just need to be sure they are not the only one.

Also, it is a good idea to name a successor to the successor trustee, to make sure that even if something happens to the original trustee someone you choose is in charge of the assets and distribution.

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