A trust, similar to a will, is a way to designate what happens to a person’s belongings after they pass away.
How a Trust Works
When setting up a trust (also known as a trust fund), the grantor creates and transfers assets, such as money or property, to it. They decide what happens with the assets and when. For example, the grantor can designate that the money or items be dispersed to the beneficiaries (the people or entities, such as a school or charity, that receive the assets in a trust) at a certain time or for certain uses. The trust is managed by a trustee who is in charge of ensuring that the terms of the trust are met. There are two main types of trust funds: revocable and irrevocable.
A revocable trust (also called a revocable living trust) has more flexibility than an irrevocable trust. It’s set up and operated while the grantor is still living and they are usually designated as the trustee. This means that they can make decisions to modify the terms of the trust how they see fit as well as transfer things in and out of it.
The grantor technically still owns all the items in the trust while it is revocable. The grantor also designates a successor trustee, who will take over when they die. When the grantor passes away, the trust automatically becomes an irrevocable trust. The biggest reason to choose a revocable trust is the flexibility, but it doesn't offer all the same benefits of an irrevocable trust.
An irrevocable trust is almost impossible to change once it’s set up. The grantor essentially creates a separate entity and transfers the ownership of the assets in the trust to that entity. This means that the grantor no longer owns the items and the beneficiary doesn’t own them until the terms are met and they are dispersed. Because of that, the grantor doesn’t have to include the items in a trust when filing their taxes. This also protects the items in the trust from lawsuits or creditors. Finally, unlike a revocable trust, most irrevocable trusts can protect beneficiaries from having to pay estate taxes, which is the taxes paid when a deceased person transfers property to an heir.
Benefits and Drawbacks
Along with the specific benefits of revocable and irrevocable trusts, there are a few other important things to be aware of:
- A trust allows you to skip over the probate process, which is the sometimes lengthy or expensive process used to verify a will
- A trust has specific terms that designate when money can be distributed, which can be helpful if the grantor is worried about the financial decisions of a beneficiary and doesn’t want them to spend everything all at once
- A grantor can set up trust funds to be distributed for certain things, such as college tuition fees or buying a house
- Unlike wills that are public record, what happens with a trust is private
- A trust can be expensive to set up and maintain
- Setting up a trust can be complicated and a grantor will probably want to consult with an expert
- If you set a trust up to only be distributed for certain reasons, such as for a mortgage, but the beneficiary needs the funds for something else, they won’t be able to withdraw the money early or for another purpose
Whether a trust fund is right for you and your beneficiaries will depend on many factors, but if you think it may be a benefit to you or your loved ones, consider setting up a meeting with a professional to discuss your options.