A trust can be an effective asset management tool that can help plan your estate during your lifetime. However, there are different types for different purposes, so it’s essential to know your options. Here, we outline the roles within a trust, common types of trusts, how to create one, and the benefits and drawbacks of creating one.

An older adult couple sit with their grandchildren.
A trust can be an effective estate planning tool that can benefit your beneficiaries.

What is a trust?

A trust is a legal relationship that a property owner gives a third party the authority to manage assets for the benefit of the property owner’s designated recipient. Having one helps you control how your loved ones will receive your assets. It can also help during tax time, as having a trust may decrease your tax burden.

Roles within a trust

There are typically three players in trust: the grantor, the trustee(s), and the beneficiary or beneficiaries. Each role has a specific purpose in creating a legally valid trust. 

What is a grantor?

When you create a trust, you are the grantor because you own the property in the trust. The grantor sets the terms of the trust, including what assets to include. A grantor must assign a beneficiary and decide who will act as a trustee.

Grantors can retain or relinquish control of the trust property depending on the type of trust. The grantor also sets when the beneficiary receives the property in the trust.

What is a trustee?

The grantor chooses a trustee to carry out the trust’s terms. A trustee is responsible for completing the following tasks:

  • Closely follow the instructions in the trust.  
  • File tax returns for income the trust property generates.
  • Make appropriate investments.
  • Remain accountable to beneficiaries and manage the trust property in the best interest of the beneficiaries.
  • Distribute the trust property at the time set in the trust document.

What is a beneficiary?

A beneficiary is a person or entity that will receive the property at the time stated in the trust. A beneficiary can be a person or a charity.

Revocable trust vs. irrevocable trust

There are two broad categories of trusts. Other trusts fall into one of these major categories. Your estate plan may require irrevocable and revocable trusts.

Revocable Trust

Revocable trusts allow grantors to change trust terms during the grantor’s lifetime. The grantor keeps control over the trust assets during their lifetime and can continue to collect the income from trust assets as long as they live. Like a last will and testament, the terms of a revocable trust become final when the grantor dies. A grantor can name themselves as a trustee in a revocable trust. Creating a revocable trust may allow your beneficiary to avoid probate, but your heirs will unlikely avoid estate or inheritance taxes.

Irrevocable Trust

An irrevocable trust aims to lower a beneficiary’s estate taxes after receiving the property. This kind of trust removes assets from the grantor’s estate and places them into that trust. The terms of this kind of trust can’t change once it is created. 

Because an irrevocable trust removes the trust assets from a grantor’s estate, the grantor is not required to pay taxes on the income generated from the trust assets. The grantor’s creditors cannot use the trust assets to satisfy a judgment against the grantor.

Special types of trusts

Trusts often help solve common problems, such as who pays taxes on trust property and how much tax liability the owners owe. When creating an estate plan, you may consider the following common types of trust:

Irrevocable trusts

  • Credit Shelter Trust: A deceased spouse’s assets are placed into trust to avoid becoming a part of the surviving spouse’s estate. This structure helps reduce or avospouse’sax for the surviving spouse.
  • Marital Trust: The first spouse creates this trust to benefit the other. After the first spouse’s death, their assets will become a part of the surviving spouse’s estate. The surviving spouse can avoid paying estate taxes on the income the assets generated, but their heirs will incur the tax liability that the surviving spouse avoided.
  • Charitable Trust: These trusts create a family legacy for charitable giving. Depending on the trust structure, you can set aside specific assets for donation or continue to receive income from trust assets for a limited period.

Revocable trusts

  • Totten Trust: These trusts are also known as payable-upon-death accounts. These trusts allow you to include a beneficiary of your bank account who will receive the money left in your account after your death.

How to create a trust

There are several steps you have to take to create a trust. Your state’s laws determine the requirements for a valid trust, but here are some general steps you should follow:

Decide what property to include

The assets you put into trust are called trust property. You can place any asset into a trust as you own the asset in your name. Some examples of assets you can include are money, houses, real estate, bonds, or life insurance policies.

Choose your beneficiaries

Your trust document must name beneficiaries. Beneficiaries can be individuals, charities, or a combination of both.

Choose your trustee

Your trustee has an important job. Who you name as a trustee is responsible for carrying out your wishes, so choose a trustee you trust. Someone other than your beneficiary should serve as your trustee. You can pick one or more people. You can also choose a business, like a law firm, as your trustee.

Put the terms of the trust agreement in writing

Your trust document should be in writing. You and your trustee will each sign the trust after you reduce the terms to writing. The state may require you to notarize your trust.

Benefits of Having a Trust

Maintain an income

You can continue to earn money from your property depending on the type of trust you create. In a revocable trust, you keep ownership over trust assets and the income generated from the property for life. If you put stocks into trust, for example, you can continue to receive their income. If you place your interest in a company into a revocable trust, you can still receive dividends from the business’s profits. Retirement-age individuals who want to stop working but maintain their standard of living or pay for senior living expenses can benefit from continuing to earn an income from the trust property. 

Avoid probate

Placing your property in a trust may allow your heirs to avoid probate. Probate is the legal process of verifying the validity of the last will. The probate process can last for years, and your assets cannot be distributed to your heirs until probate is complete. A trust allows your beneficiaries to access the property you intended they have more quickly.

Tax benefits

A trust may help your beneficiaries avoid paying high estate taxes after you pass away. Estate taxes are reduced because the property you placed into a trust is no longer a part of your estate, so it is not included when an estate tax is calculated.

Protect your property from creditors

Property placed into a trust is no longer a part of your estate. Because the property is no longer in your estate, creditors cannot use the trust property to satisfy a judgment against you.

Downsides of creating a trust 

Creating a trust can be the right fit for you, but there are some potential disadvantages to creating a trust. There are two major disadvantages that you should consider before you create a trust. 

You must keep a clean record of assets 

If you place your assets into a trust, you must keep a clean record of what property still belongs to you and what property now is no longer a part of your estate. Taxes, among other things, can become complicated if you do not keep a clean record of assets. 

Complete more paperwork

Creating a valid trust may require changing the legal title to the property placed in a trust. This may be a tedious task, but it is necessary. You may want to hire an attorney to ensure you complete the paperwork correctly. 

Which trust is right for me?

You should speak to an estate planning attorney in your area if you consider creating a trust. While complex, trusts can be practical estate planning tools that may give you more control over your property.