If you are considering creating or updating your estate plan, you may have heard about trusts, but are not really sure what a trust is, how it works, and whether it is something that would be useful or appropriate for you. This article will discuss the basics of trusts and help answer those questions.

What is a Trust?

Definition of Trust. A trust is a particular way of owning property. Think of property as a bundle of rights. That bundle consists of two parts, legal title and beneficial title. Legal title determines who controls the property, while beneficial title determines who is to benefit or use the property. Normally when you own property, whether it’s real estate, stocks and bonds, or bank accounts, you hold both legal and beneficial title. A trust, however, is a special legal arrangement that divides the ownership or title to property into those two parts. A trust is normally evidenced by a written trust document, and there are three parties involved. If you set up the trust, you are called the grantor or settlor. The trustee is the person holds legal title to any assets transferred to the trust. The trustee manages those assets according to the instructions you set out in the trust document.

In your trust, you also name beneficiaries. They hold beneficial title to the trust property and have the right to use or enjoy the property, again, according to your instructions. Some beneficiaries may have current rights to enjoy the trust property and some may have rights to enjoy the trust property in the future.

As the grantor of the trust, you name the trustee, give the trustee management instructions, you name the beneficiaries, and you specify how and when the trustee is to distribute property to the beneficiaries. Depending on the type of trust you create, you may be the grantor, the trustee and the beneficiary.

Types of Trusts. There are many different ways to classify trusts. For instance, there are revocable and irrevocable trusts; and there are testamentary and living trusts. A revocable trust is one that you can amend or revoke during your lifetime. An irrevocable trust, of course, is just the opposite. You can’t change it or revoke it. A testamentary trust is a trust that you set up in your Will and it does not take effect until your death. A living trust is a trust that you establish to be effective during your life. It is sometimes called an inter vivos trust. This article will focus on the revocable living trust and how it can fit into your estate plan.

Revocable Living Trusts. Let’s discuss how a revocable living trust can help you accomplish your estate planning goals. With a revocable living trust, you can name yourself as trustee and as the beneficiary while you are living. That way, you manage and enjoy the trust assets virtually as though they were not in trust; if for any reason you decided to terminate the trust or you want to transfer or sell some of the assets out of the trust, you could do it. And as with other types of trusts, you can name successor trustees to take over at your death or if you become incapacitated. Of course, your successor trustee should be someone whom you trust completely.

How can a Living Trust help during your lifetime?

Incompetency. A good estate plan will include planning for your lifetime as well as for your death. During your lifetime, you could become incompetent or incapacitated due to any number of causes, such as an accident, stroke, dementia, etc. This could prevent you from carrying on your daily activities, including your financial affairs.

Guardianship. If you haven’t made the proper arrangements before you become incompetent, the state may take control of your assets through a court ordered guardianship. The court would appoint a guardian to make decisions for you and manage your assets for you. You would not be entitled to name your own guardian; the guardian would normally have to post a bond, file an inventory of all your assets, final annual accountings with the court, and get the court’s permission to spend your money for you. All of your assets and how they are used become public information. With legal fees and other expenses, it can be an expensive, time consuming and it involves public exposure of your assets.

Trust Planning. On the other hand, if you have created a living trust which holds your assets, there would be no need for a guardian to be appointed to manage your assets. Legal title to your assets would be held by your successor trustee. Your trust could provide that no bond would be required, that no accountings need to be filed with the court, and that the court is not required to supervise how your assets are used for your own benefit. While some of this can be done with a power of attorney, if a guardian is appointed, he or she can revoke your power of attorney. A trust is a much more complete way of you being able to control what happens in the event of your incompetency.

How can a Living Trust help upon your death?

Probate. Probate is the legal process whereby a court oversees the proper distribution of your probate assets to creditors and beneficiaries. Probate assets are those assets that pass under your will (or if there is no will, then to your heirs according to state law). Certain types of assets may not have to go through probate, such as jointly owned property with right of survivorship or assets with beneficiaries. Assets you have transferred to your living trust prior to death also avoid probate. Your assets that do go through probate will become public information, as a detailed inventory and accountings are required to be file with the court.

Avoiding Probate with a Living Trust. If done properly, a living trust can be a great tool for avoiding probate. Upon your death, the trust acts like a will, except that the assets in the trust do not have to go through probate. Like a will, your trust would direct how your trust assets are to be administered and distributed upon your death, except without the supervision of the court.

You can also name your trust as the beneficiary of certain types of assets, such as life insurance, bank accounts, or investment accounts., in which case they would not go through probate either. You may want to name your trust as beneficiary of these assets because your trust can have provisions for various contingencies (such as if a beneficiary dies before you); you can also provide in your trust for your trustee to continue to hold and use those assets for under-aged or incompetent beneficiaries until it is appropriate to distribute them outright.

Coordinating Your Trust with your Will. Even with a trust, you will still need a will, because you may still have some probate assets. Typically, when you have a revocable living trust, your will would simply leave all of your probate assets to your trust, instead of to individuals. This type of will is often referred to as a “pour-over will.” This arrangement allows a great deal of privacy, not only of your assets, but of who is to inherit your assets and under what circumstances.

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