Understanding the Basics of Trusts
In its simplest form, a trust is established when one person, who is known as a “grantor” or “donor,” transfers ownership of property to another, known as a “trustee.” The trustee is charged with managing the property on behalf of beneficiaries of the trust. Interestingly, the grantor can also be a beneficiary of the trust, but not the only beneficiary. When the grantor transfers the assets to the trustee, the new title has to reflect the trustee's name. Trusts can be established in two ways:
Living trusts are created while the grantor is still alive.
Testamentary trusts are written into a will and go into effect after death.
Trusts can be either “revocable,” meaning that the grantor has the right to change or end the trust at any time or for any reason, or “irrevocable,” in which the trust is established so that it cannot be amended or terminated under any circumstances.
An individual, such as your attorney, or an institution, such as a bank, can function as a trustee. An institution will most likely offer more services — for a fee — and more experience handling trusts. You might prefer a family friend or relative who would know your preferences when handling assets on your behalf. Often, they will not charge any fee. When you are considering whom to appoint as a trustee, consider the following:
How complex will the management of your assets be?
What are the needs of the beneficiaries of your trust?
What are your goals for the trust?
Which candidate has the best balance of experience, reliability, and any other qualities you seek?
When you are considering establishing a trust, you will want to weigh how much control you may want to retain, how much flexibility would be desirable, what tax considerations need to be addressed, and, ultimately, what you plan to allocate for your heirs. Trusts can be a terrific component to your estate planning. They are highly personalized, tailored exactly for what you want to accomplish with your property. Not only does a trust carry forth your wishes upon your death, it can go into effect if you become incapacitated and are unable to make decisions.
A trust has a separate financial existence. It may have its own bank account and may have its own federal ID number for tax purposes. Once the trust is established, you can transfer bank accounts, securities, life insurance, real estate, or other personal property into it. The trust assumes ownership when you transfer its name to the title for each asset it holds.
Reducing taxes is a major driving force for establishing a trust. Sometimes, however, establishing a trust is a matter of simplifying things. If you have a vacation home in a different state than your primary residence, for example, it may make sense to hold your real estate in trust.
