Trust

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A trust is a legal tool used by many individuals to control how their assets are managed after their death. Once a trust has been created, the creator, called a “Trustor,” transfers ownership of certain specified property and financial assets to the trust for the benefit of others, called “beneficiaries.” The assets in the trust are then managed by a “Trustee,” appointed by the Trustor. A trust is part of the estate planning process, protecting the Trustor’s assets while he is alive, and dictates how the assets are to be distributed upon the Trustor’s death. To explore this concept, consider the following trust definition.

Definition of Trust

Noun                                                                             

  1. An agreement in which a fiduciary relationship is created in which one party (the Trustor) gives another party (the Trustee) the right to hold ownership of certain assets, and to manage them for named beneficiaries.

Origin

1175-1225        Middle English < Old Norse traust

What is a Trust

A trust is an estate-planning tools used in conjunction with, or in place of a will. Unlike a will, a trust can help an individual manage his assets during his lifetime, while specifying how those assets are to be managed or distributed upon his death. When creating a trust, the Trustor transfers legal ownership of his property and assets to the trust, to be managed by the named Trustee. In some circumstances, the Trustor can act as Trustee of his own trust, to retain ownership and maximize control over the assets. If the Trustor acts as Trustee, he must name a successor Trustee to take over after his death.

People create trusts, not only to ensure their wishes are carried out after their death, but to avoid probate proceedings. A trust must be a written document that adheres to the legal requirement of the probate code in the state in which the Trustor lives. The terms “Trustor,” “Grantor,” and “Settlor” are often used interchangeably.

History of the Trust

The concept of the legal trust has existed since the days of Roman law, as early as 400 BC, and was adopted in English common law in the 16th century. Early trusts, as provided in Roman law, were “testamentary trusts,” which were created by the individual’s will, and went into effect only after their death. British common law introduced the inter vivos trust, which is a “living trust,” funded and managed during the Trustor’s lifetime, with additional terms going into effect after the Trustor’s death.

This came about during the Crusades, as landowners left their holdings to fight, giving control over their lands and estates to be managed by trustees until their return. The King’s court, however, refused to recognize the claims of returning Crusaders, allowing trustees who refused to return the estates to their rightful owners. Eventually these matters were turned over the a Lord Chancellor, who ruled that it was unthinkable that a trustee would go back on his word to the Crusader. Through this system, the legal trust was born.

Living Trust

Normally, the terms of a trust become effective upon the death of the Trustor. A “living trust,” however, becomes effective while the Trustor is still living. Once the trust has been created, the Trustor transfers legal ownership of whatever assets he likes, whether all of his assets, or only certain items, to the trust, to be managed by the named Trustee. Often, individuals creating living trusts name themselves as Trustor, specifying an alternate Trustee to take over those duties upon his death or incapacitation.

There are many reasons an individual may choose to create a living trust, chief of which include avoiding the probate process, and maintaining privacy of their estate. Additionally, some types of living trusts offer specific tax benefits to the Trustor and beneficiaries.

Family Trust

A family trust is another term for a revocable living trust, and may be set up by more than one individual. It is common for couples to set up a family trust to manage their assets, and plan for how those assets will be distributed in the event one or both spouses passes. While a third party may be named Trustee of a family trust, most commonly both spouses serve as co-Trustees until one spouse passes or becomes incapacitated. Usually, assets in the family trust become the property of the surviving spouse, then are passed to their heirs or named beneficiaries following the surviving spouse’s death.

Revocable Trust

The term “revocable trust” refers to a trust over which the Trustor maintains the ability to make changes. Whether or not the Trustor acts as Trustee of his own trust, he reserves the right to add and remove assets, change beneficiaries, or change Trustees. The Trustor may also simply terminate, or “revoke,” the trust if he desires. Any trust, whether standard or living, may be made a revocable trust.

Irrevocable Trust

Unlike a revocable trust, an irrevocable trust cannot be altered or revoked after it is created. In creating a revocable trust, the Trustor releases all control over the assets transferred into the trust, removing those assets from the individual’s estate permanently. While a Trustor may act as Trustee of a revocable trust, he cannot act as Trustee of an irrevocable trust, but must relegate management of his assets to a named Trustee. There are certain tax benefits to an irrevocable trust that are not available to a revocable trust because the Trustor has relinquished ownership of the assets it contains. Because of the finality of an irrevocable trust, they are generally only used in very special circumstances.

Charitable

A charitable trust is one in which the assets are intended to benefit a specific charity or the general public. Assets of a charitable trust are held and managed by the charity for a specified period of time, the interest generated by investing the assets going to the charity. Individuals who create a charitable trust do so because of the tax breaks offered in capital gains taxes, estate taxes, and even federal income taxes. Individuals can receive advice on the benefits of a charitable trust from an estate planning attorney, tax professional, or investment professional.

Special Needs Trust

A special needs trust may be set up to benefit a special needs person who receives some type of government benefits, such as Social Security Disability, or food stamps. Normally, an inheritance, or gifts given to an individual receiving such benefits would disqualify them from the government program, or decrease the amount of benefits received. By placing assets or money into a trust for the benefit of a special needs person, without allowing them direct access to control or terminate the trust, the individual remains eligible for government benefits, while still receiving certain benefits of the trust. This is a legal way to provide for such an individual, helping to ensure they live in relative comfort and happiness. Special needs trusts commonly include a provision terminating the trust in the event it has a negative effect on the individual’s eligibility for government benefits.

For example, Mary is medically disabled and receives Social Security disability benefits, Medicare, and food stamps. Under ordinary circumstances, Mary cannot make over a certain amount of money or she will be disqualified from receiving some of her benefits. When Mary’s grandmother dies, she leaves Mary a large sum of money. In order to avoid causing Mary to lose her food stamps benefits, the inheritance is placed in a special needs trust to be managed for Mary’s benefit by a named Trustee. The Trustee can see to it that Mary’s needs are met, while Mary continues to receive the government benefits upon which she relies.

Totten Trust

A Totten trust is a form of revocable trust in which an individual deposits money into a bank account or certificate of deposit for the benefit of another person or entity. The individual creating the Totten trust serves as Trustee during his lifetime. Totten trusts may be established with any type of bank or securities account, but not with real estate. When opening the account, the title of the account should include language identifying the intended beneficiary, such as: “In trust for [beneficiary’s name],” “Payable on Death to [beneficiary’s name],” or “As trustee for [beneficiary’s name].” This helps avoid issues regarding ownership of the account when the Trustor passes away.

The Totten trust is sometimes referred to as a “poor man’s trust,” as no legal trust document is involved, it costs the creator nothing to establish. Totten trusts avoid probate, as the account transfers immediately to the beneficiary upon the Trustor’s death.

Tax By-Pass Trust

A tax by-pass trust is created in order for an individual leave money to his or her spouse without being subject the excessive federal estate taxes when the second spouse dies. Assets that pass from one spouse to another are not subject to taxation, but when those assets transfer to the couple’s heirs after the second spouse passes, they may be subject to taxes as high as 55 percent. Using a tax by-pass trust ensures this situation is avoided, potentially saving the couple’s heirs hundreds of thousands of dollars.

Trust Fund

A trust fund may be established to provide for a person or entity, and is commonly used to provide financial security for an individual’s children or grand children. Trust funds generally consist of cash, bonds, stocks, and real property, as well as the interest or proceeds earned by any of these assets. The creator of a trust fund specifies when the beneficiary can begin receiving a yearly income from the fund, which is commonly a specified age, such as 18 or 21 years, or when a specific event occurs, such as marriage or birth of a child. Some trusts funds allow the Trustee of a trust fund to provide the beneficiary with early allowances from the fund for educational or medical costs.

Related Legal Terms and Issues

  • Asset – Anything owned or controlled by a person or company that is expected to have value.
  • Beneficiary – A person named in a will or trust as the intended recipient of assets or property.
  • Contract– An agreement between two or more parties in which a promise is made to do or provide something in return for a valuable benefit.
  • Creditor – A person or entity to whom money is owed by another person or entity.
  • Trustor – A person that creates a will, trust, or who transfers interest in real property to another.
  • Grantee – A person that receives an interest in real property according to a deed.
  • Jurisdiction – The legal authority to hear legal cases and make judgments; the geographical region of authority to enforce justice.
  • Probate Court – The section of the judicial system that deals with matters relating to wills, trusts, estates, guardianships, and conservatorships.
  • Real Property – Land and property attached or fixed directly to the land, including buildings and structures.
  • Trustee – A person given control of property according to a trust.