What is a Trust?

A trust is a legal relationship between three essential parties to the trust:  (1) the grantor (the party creating the trust); (2) the trustee (the party who manages the assets of the trust for the benefit of the beneficiary); and (3) the beneficiary (the party whom the trust benefits).  A single party may function in more than one of the three roles.  There are two general categories of trusts:  living (inter vivos) trusts, and testamentary trusts. More specialized trusts are utilized for charitable and tax planning.

Living Trusts

Living trusts afford grantors a wide variety of tools for managing wealth, providing for loved ones, protecting assets, and mitigating tax liabilities.  A grantor can be both the beneficiary and trustee of their own trust.  While flexible, use of trusts in this fashion has its pitfalls, particularly in relation to creditors’ claims, and should be utilized with caution.

Testamentary Trusts

A testamentary trust is governed and funded by the terms of a will, and does not come into existence until the grantor’s death.  A testamentary trust is often utilized when a beneficiary is unable (due to age, incapacity, or character issues) to be trusted with their share of the grantor’s property.  By creating an testamentary trust, after death the grantor can provide for the beneficiary with the benefit of a trustee’s supervision over distributions to the beneficiary.

Trusts and Avoidance of Probate

Trust assets are not part of the decedent’s estate, and therefore avoid probate.  While avoiding probate has its benefits, administration of a trust is not without its own demands, including prudent investment of trust assets, dealing with and keeping beneficiaries informed, distribution of trust income, filing and payment of taxes, and payment of expenses.