Trusts 101: What A Trust Is And How They Work

When creating an estate plan, a common aspect you will come across is called a Trust. At its most basic definition, a Trust is a legal structure in which a person manages or holds an asset to benefit another person. The one who holds the property is called a Trustee, whereas the person (or entity) who is benefitting is called a beneficiary. There is also a third party involved — the person who creates and funds the Trust initially, often referred to as a Trustor or Grantor.

Let’s break down those roles, and then dive into what exactly a Trust can do in regards to estate planning with an estate planning lawyer. First is the Trustor; this is the person who is doing the estate planning. They are someone with an asset, whether that’s money, physical property, or investments, that they would like to eventually give to someone else. Next, is the beneficiary. This is the person or the entity that is receiving the asset from the Trustor at some point. In the middle of these two is an intermediary who is managing this transfer and holding of the asset, called the Trustee. A Trustee can be a person, or there are firms that can manage this relationship. The Trustee is the conductor of the whole operation, ensuring the Trustor’s wishes are adhered to and the directives as outlined by the Trust are followed.

The term “Trust Fund” often brings to mind the super-rich and generational wealth, but in fact, Trusts are an important building block of estate planning for families of all wealth situations. Trusts are a more specific, and private, way to enumerate the distribution of assets. Whereas Wills only go into effect after a person dies, a Trust can become active at any time, even as soon as it’s created by the Trustor and the Trustee.

The assets in a Trust can also be controlled, unlike a Will in which the assets pass immediately to the beneficiary and become their property in full. A Trustor can structure a Trust to be paid out in portions over time, or to be paid out to the Trustee when they reach a certain age. There are also more nuances that can be defined in a Trust, such as assets and distribution between different family members and entities based on situations — marriage, death, divorce, etc.

A Trust is one of the most straightforward ways to avoid probate, a sometimes lengthy and contested legal process by which the assets of someone who dies are distributed to their beneficiaries. For that reason, Trusts are created ahead of time and the assets are technically a part of the Trust, not in the possession of the Trustor at the time of death, the process is much smoother and often faster.

Assets in a Trust are oftentimes protected from creditors and taxes, depending on the structure of the Trust, which can be a benefit to those with larger tax burdens or those looking to qualify for medical benefits while still protecting some of their personal wealth.

There are different categories of Trusts that are able to do specific things or benefit specific people. The best way to decide which is right for you is to get in touch with an attorney you can count on from McCarthy Law, LLC, and walk through the options that best fit you and your estate plan.

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