A Trust is a legal arrangement where one person (the “Settlor” or “Grantor”) gives legal title of property to another (the “Trustee”) to hold for the use and benefit of a third-person (the “Beneficiary”). The Settlor is the owner of the property that is to be placed into the Trust, thus becoming Trust Property. Trust Property can be money, stock, real estate or any other form of real or personal property. The Trustee is the person or entity (such as a bank) that agrees to maintain or invest the Trust Property for the use and benefit of the Beneficiary. It is common for a Settlor to also be the Trustee, meaning the person who creates the Trust maintains or invests the Trust Property for the use and benefit of the Beneficiary (so no one else needs to be nominated or hired as Trustee so long as the Settlor/Trustee is able to act). The Beneficiary is the person or entity for whom the Trust is created.
To create a Trust, the Settlor transfers ownership of property to a Trustee based upon certain terms and conditions that are listed in a Trust Declaration. The terms and conditions of a Trust Declaration are instructions that the Trustee is bound to follow in maintaining or investing the Trust Property.
In practice, when a Settlor is also going to be the Trustee, the Settlor will transfer property to himself as Trustee and select a person or entity to succeed him. Upon death or disability of the Settlor/Trustee, his successor will then become Trustee and follow the terms and conditions of the Trust.
There are three main reasons to employ the use of a Trust. First, a Trust keeps the Settlor’s estate from having to endure probate, as a Trust outlives the Settlor and can distribute the Settlor’s estate after his death. Second, a Trust can be used to gain significant tax-saving advantages by reducing the taxable portion of an estate. Last, a Trust can shelter property from creditors, loved-ones who cannot handle large amounts of money, and the government. Consider a Trust that regulates the amount of funds children receive or a Supplemental Needs Trust, which is a Trust used when one needs to retain eligibility for government benefits (specific trust arrangements will be discussed in future issues).
Trusts are a great tool to achieve one’s future planning objectives. If you seek greater control and protection of your property and its distribution, a Trust is the ideal utility to include in your estate plan.