You hear the term ‘trust’ often in relation to estate planning. People set up ‘trusts’ as one legal method of transferring assets to another person or organization. But how is a trust different from a will, and why would a person opt to set up a trust? Are there different types of trusts available? As per the norm with anything related to the exchange of money or property, many rules and regulations apply. The purpose of this article is to provide a basic understanding of what a trust is, provide some examples of how one might utilize a trust in their estate plan, and offer suggestions on where to find additional information to set up a trust.
According to dictionary definitions, trust means reliance on or confidence in the integrity, ability or character of a person or thing. But it also is defined as something committed to the care of another, and this is the definition that most applies to a legal trust. A trust is a legal arrangement that is established to transfer assets from one person to another person, or to an organization. At its most basic, a trust involves 3 parties.
- The trustor: This is the person whose property is being held and/or transferred according to the terms of the trust.
- The trustee: This is the person, persons or company (such as a bank or attorney) assigned legal control over the assets in the trust that is responsible to ensure the terms of the trust are carried out.
- The beneficiary: This is the person or persons who will (sooner or later according to the terms of the trust) receive some or all of the property held in trust.
Trusts are commonly utilized by parents of minor children as part of their estate planning process; set up as a contingency in the event that the parents die before the children reach the age of maturity. In this case, a third-party (the trustee) is called upon to manage the assets in the trust for the benefit of the children until such time as they can manage their own assets. A trust may also be set up to provide for the lifelong care of a disabled child beyond the death of the parents; in this case the assets are used for the child’s benefit, but the contents of the trust are permanently managed by the trustee and will never transfer to the beneficiary.
The transfer of assets can also be a part of setting up a will, for example ‘the entirety of my estate should be evenly shared by my children’. However, there are a few characteristics of trusts that make them more appealing and more beneficial than a simple will.
- Wills are public documents and may be scrutinized or contested by anyone with a claim against an estate. A trust is a private legal arrangement handled by a legal document that is not available for public scrutiny. Trusts maintain privacy.
- With a will, no property is transferred or affected until the owner of the will dies. A trust takes effect and transfers the property to the care of the trustee immediately. It is more flexible, in that it can be used to transfer assets before death, at the time of death, or many years after death. Trusts provisions offer flexible distribution of assets.
- Wills must go through "probate” which is the process where a court of law ensures the will is valid and the distribution of property happens as intended. Probate can be costly, and can take time during which the assets are not available to the beneficiaries. A trust does not go through probate, since the assets are a part of the trust – not of the estate. Trusts save time and money.
A trust does not involve concerns generally made a part of wills, such as naming a guardian for minor children. It is a simple transfer of assets. In this respect a trust does not replace a will; it provides alternatives for transferring assets that may provide tax benefits as well as those benefits mentioned above.
There are 2 types of trusts, Revocable Trusts and Irrevocable Trusts
. The difference lies in the control maintained by the trustor over the assets in the trust. With an irrevocable trust, the trustor relinquishes total control of the assets and may not change the terms of the trust. A revocable trust may be amended by the trustor up until the time of their death.
If the establishment of a trust is something that would benefit your estate plan, or something you would like to learn more about, the logical "next step” is to contact your banker or your attorney for additional details. There are an abundance of on-line resources as well; most banks and law firms who offer trust services, such as Texas Gulf Bank’s Wealth Management Department
, will be happy to answer your questions and provide additional information.