5 Things to Know about Trusts
At one time, trusts were used almost exclusively by wealthy families as a tool to pass down the family wealth while maintaining a certain degree of control over how that wealth is used by future generations.It is now common, however, to find a trust in even a relatively simple estate plan.
Trust ElementsAll trusts require the same five basic elements for creation, including:
• Trustor – the person who creates the trust. A Trustor may also be referred to as the Grantor or Maker of the trust.
• Trustee – an individual or entity that administers the trust terms as well as manages and invests the trust assets. Most Trustors also appoint a successor Trustee in case the original Trustee cannot or will not serve.
• Beneficiary – a beneficiary is the person, entity, or even family pet that receives the benefit of the trust assets. A trust may have both current and future beneficiaries.
• Terms – created by the Trustor and may be anything that is not illegal or unconscionable.
• Funding – almost anything of value can be used to a fund a trust, including cash, securities, and real property.
Testamentary vs. Living TrustAll trusts fit into one of two categories – testamentary or living trust. A testamentary trust is one that does not become active until the death of the Trustor. Typically, a testamentary trust is triggered by a provision in the Trustor’s Last Will and Testament. A living trust, formally known as a “inter-vivos” trust, activates as soon as all of the formalities of creation are completed, and the trust is funded.
Revocable vs. Irrevocable Living TrustsA revocable living trust is one that can be modified, terminated, or revoked at any time and for any reason by the Trustor. An irrevocable living trust, on the other hand, is one that cannot be modified, terminated, or revoked by the Trustor for any reason once it has been activated. While it is best to think of an irrevocable trust in these terms, the reality is that it is possible to modify or terminate an irrevocable trust in some cases; however, it usually requires the agreement of all beneficiaries and/or a court order.
Trusts Are Not Only for the WealthyAlthough once used predominantly by wealthy families to control the family fortune, trusts are now found in the average estate plan given how user-friendly they are and how versatile they are. While high net worth individuals do still utilize trusts with great frequency, individuals with a modest estate can also now benefit from incorporating a trust into their estate plan given the flexible nature of trusts.
You Should Work with an Experienced Trust Attorney When Creating a TrustFor a trust to work as intended, it is crucial that the language used to create the trust be written and reviewed by an attorney. There are several special types of trusts (such as a Medicaid trust or an asset protection trust) that will only work as intended if certain language is used in the trust agreement.