trusts

understanding trusts

A trust is a legal arrangement where one party, known as the grantor, transfers assets to a separate legal entity (the trust), which is managed by a trustee for the benefit of designated beneficiaries. Trusts are commonly used for estate planning, asset protection, and tax efficiency. By placing assets in a trust, the grantor can ensure that those assets are distributed according to their wishes, avoiding probate and potentially reducing estate or income taxes and potential creditor claims.

Trusts can be revocable, meaning the grantor retains control and can modify or terminate the trust, or irrevocable, where control is relinquished, often providing greater asset protection and tax benefits, but limiting the ability to make changes to the trust if circumstances change.

A trustee is the individual or entity responsible for managing and administering the trust in accordance with its terms and the best interests of the beneficiaries. Trustees have a fiduciary duty to act prudently and loyally, ensuring that the trust’s assets are preserved and distributed appropriately. A trustee can be a trusted family member or friend, a professional fiduciary, or a corporate entity such as a bank or trust company. The selection of a trustee is crucial because they play a key role in executing the trustor’s intentions, managing investments, and handling distributions.

When considering creating a trust, two common options are a grantor trust or a testamentary trust under a Will. A grantor trust is created during the trustor’s lifetime and allows them to retain certain rights or powers over the trust. They can eliminate the need in many cases for a guardianship to be created for the trust assets if the grantor becomes incapacitated. These trusts can also be beneficial for asset management and maintaining control while still reaping some estate planning benefits. Revocable living trusts are a popular form of grantor trusts because they enable the seamless transfer of assets upon death, bypassing probate, as long as the trust agreement is structured properly.

A testamentary trust, on the other hand, is established upon the grantor’s death through the terms outlined in their Will. This type of trust is useful for protecting assets for minors, disabled individuals, or beneficiaries who may not be financially responsible. Testamentary trusts also provide a level of asset control that can protect against creditors, divorce, or future mismanagement.

Choosing between a grantor trust and a testamentary trust depends on your estate planning goals, financial situation, and the level of control you wish to maintain over your assets. They can be a valuable part of your estate plan. Howell Legacy Planning can assist you in thinking about what type of trusts you should consider given the particulars of your situation.