Trusts can be confusing, and that often makes it challenging to determine whether you need one and how it would be used. To add to the potential confusion, there are many different types of trusts used in different ways. Here's an overview of how they work and the benefits trusts can provide.
A trust is not an account. It is sometimes defined as an entity, sometimes described as a relationship, and other times referred to as a document. Regardless of how it is defined, a trust is set up to hold property. So, a trust can hold accounts (which is why people tend to think of bank accounts when they think of trusts) but a trust can also hold other types of assets such as real estate. Some attorneys describe a trust as a virtual container or liken it to a suitcase – a way to organize assets.
The person who creates the trust and puts property into the trust is called the grantor or settlor. Once property has been moved into the trust, that property no longer belongs to the grantor but to the trust. The document that legally establishes the trust describes how the property should be used once it goes into the trust. That document also names someone to serve as trustee, and that person has the obligation to manage the property and ensure that all the terms of the trust agreement are complied with, as well as other legal obligations.
But while the trustee controls the property in the trust, they don't use it for themselves. A trustee is a caretaker for others. The person (or group of people) who enjoy the use of the property in the trust are the beneficiaries. The trustee manages property for them, and distributes it to them in whatever way the trust agreement directs.
Why People Set Up Trusts
A trust is a good tool to hold property for someone who cannot legally or mentally manage assets on their own, such as a child. Parents often establish trusts in their wills so that if they die while their children are still minors, their property can be managed and used appropriately.
However, there are many other reasons to establish trusts. The property transferred into certain types of trusts can be kept away from creditors, so it can be a way of protecting assets for someone at risk of a lawsuit or predatory creditors. Other types of trusts are set up to avoid probate when some passes away, so property can go directly to loved ones without legal expenses and delays. Still other trusts are used to reduce tax liability or qualify for long-term care benefits through Medicaid.
Types of Trusts
Trusts can be revocable, which means the terms can be changed at any time. Most revocable trusts are set up to allow property to pass to beneficiaries outside of probate. Property in a revocable trust is still considered to belong to the grantor for the most part, and the grantor can still control and use it.
When a trust is set up to protect assets from creditors, reduce taxes, or help establish or maintain eligibility for government benefits, it must be set up as an irrevocable trust. This type of trust cannot be changed, but the lack of flexibility is what makes it stronger.
A third type of trust is a testamentary trust. This is a trust set up in a will and it sits dormant until the creator dies and the will goes to probate. So, in a sense, it is revocable until the creator dies and then becomes irrevocable after death.
Peach State Wills & Trusts Can Explain the Benefits a Trust Could Provide in Your Situation
To know whether you need a trust, you need to review your circumstances and goals in detail and consider how a trust could help you reach those goals. It is a lot easier to do this with the help of an experienced estate planning attorney who understands how trusts operate in practical terms.
As a general rule, most people could benefit from one or more types of trust at some point in their lives, particularly if they have loved ones they want to protect. We invite you to schedule a consultation with Peach State Wills & Trusts by calling 678-730-2079 to discuss whether a trust is right for you.