A trust is a legal arrangement allowing a “beneficiary” to have the benefit of trust assets (money or other property) without owning legal title to the assets. A “trustee” holds legal title to the assets, and manages the assets for the beneficiary. The person who establishes and funds the trust is called a “trustor” or “settlor.” Trusts are very flexible tools, and can be set up to operate however you would like. Consider trusts to hold assets for the benefit of minor children, or your adult children, since that is one of the most common uses for trusts.
The trustee can have authority both to disburse money directly to the beneficiary and to pay it out for the beneficiary’s benefit. Examples of the latter include paying for orthodontic care, rent, or school tuition. The trustee makes all spending decisions as long as the trust lasts. In addition, the trustee is responsible for managing the trust assets, like selling and investing.
A trust is used where, for whatever reason, the beneficiary cannot or should not hold legal title to the property or manage it. For example, minor children cannot legal own property in their names, so a trust is essential for property intended to benefit a minor. Although a college-age adult can legally own property, a trustor may decide that it is better for the trustee to manage the property until college graduation or a certain age. In age-related trusts, once the beneficiary reaches a specified age, the trust assets are distributed outright. Another situation requiring a trust is when the beneficiary is mentally or developmentally disabled, such that the beneficiary would be unable to manage the property or would find the task burdensome, or where owning the assets outright would disqualify the beneficiary from important government assistance. Trusts prevent a beneficiary’s creditors from reaching and depleting trust assets, as long as the assets remain in the trust. Trusts can also be set up to benefit charities.
Trusts can be established and funded while the trustor is living (called a “living trust” or “inter vivos trust”) or by a will that funds the trust upon a person’s death (called a “testamentary trust”). Living trusts can be useful as part of tax and estate planning.
Living trusts can be “revocable” or “irrevocable.” Revocable trusts can be changed or even terminated by the trustor if their needs or priorities change during their. The terms of an irrevocable trust cannot be changed. The IRS recognizes irrevocable trusts as gifts for tax planning purposes, but not so with revocable trusts. Revocable trusts do not have to file a separate tax return, whereas irrevocable trusts usually do. Most people prefer revocable trusts over irrevocable trust. However, there is a hybrid where a revocable trust become irrevocable upon the happening of a certain event, like the death of the first spouse. They can be very useful in planning for blended familes.
Trusts should have a “contingent beneficiary,” to become the new beneficiary if the original beneficiary were to die before the trust were terminated by some other event. Similarly, trusts should also have a “contingent trustee,” who would be the second choice to serve as trustee if the named trustee were unable to continue to serve. An attorney can assist you in making decisions about whether and how a trust may help you achieve your planning goals.
Kim K. Steffan is an attorney with Steffan & Associates, P.C. in Hillsborough, NC. She can be reached at 919-732-7300 or firstname.lastname@example.org.
This article was last updated in January 2020.