What is a Trust? 

While estate planning for many individuals and couples is adequately accomplished through the use of simple wills, trusts can offer benefits which cannot be obtained solely through the use of a will. At its most basic level a trust is an entity that is created to hold property for an individual’s or multiple individuals’ benefit. The duty to manage the property is in effect separated from the right to enjoy the benefit of the property. A trust involves three main players: 1) the grantor (the guy setting up the trust and moving property to the trust), 2) the trustee (the guy in charge of managing the property the grantor puts in the trust), and 3) the beneficiary, or beneficiaries (the ones for whose benefit the trustee manages and distributes the property that the grantor puts into the trust). These relationships are set out in a legal document called the trust agreement (the thing that legally creates the trust and establishes the roles of the grantor, trustee and beneficiaries.

There are revocable trusts and irrevocable trusts. The main difference (other than the obvious) between revocable trusts and irrevocable trusts is the way they, and the property they hold, are taxed and able to protect assets. Any discussion of the tax implications of one type of trust vs. another is outside of the scope of this post, but if minimizing tax liability is your primary objective, then rest assured that years of creative thinking (and some trust-obsessed attorneys and accounting professionals) have led to a plethora of options when it comes to tax planning and asset protection through the use of trusts.

Trusts may also further be classified as testamentary trusts or living trusts. A testamentary trust is not legally created until after death, most likely in a will while a living trust, or inter vivos trust, is just that- one created during the life of the grantor. Living trusts may be revocable or irrevocable, depending on how they are set up while testamentary trusts are irrevocable (since the individual who creates them is no longer living and thus unable to revoke them). A trust is created by a trust agreement which sets forth the means by which the property it contains should be managed and distributed. It also delegates who shall serve as the trustee and designates the beneficiaries. Assets (cash, stocks and bonds, real estate, etc.) must then be specifically transferred to the trust by titling them in the trust’s name.

Once completed, the trust is the legal owner of the asset.

Michael F. Brennan runs a virtual law office helping clients in Illinois, Wisconsin, and Minnesota with estate planning and business law issues. He can be reached at michael.brennan@mfblegal.com with questions or comments, or check out his website at www.thevirtualattorney.com.

The information contained herein is intended for informational purposes only and is not legal advice, nor is it intended to create an attorney-client relationship. For specific legal advice regarding a specific legal issue please contact me or another attorney for assistance.