How Do Trusts Work?

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How Do Trusts Work?

Posted By Mark Glendon     December 20, 2021    


A common misconception is that the only people who have trusts are very rich people with lots of assets who are trying to avoid taxes. However, this isn’t true, and it’s not entirely dependent on how much money or property an individual has. If you’re thinking about getting your estate planning documents in order, you should know that you don’t have to have a lot of assets to create a trust and you may establish one for a number of different reasons.

What is a trust?

A trust is defined by Investopedia as “a fiduciary relationship in which one party, known as a trustor, gives another party, the trustee, the right to hold title to property or assets for the benefit of a third party, the beneficiary.”

An individual may create a trust for many purposes, including estate planning, medical planning, tax purposes, charitable giving, and more.

How do they work?

Typically, the trustor (also sometimes called the grantor) appoints a trustee to manage the trust. Depending on the type of trust, the grantor may be the trustee, or the trustee may be a third party. The grantor picks beneficiaries (the individuals who may inherit assets while the grantor is alive or upon their death). Depending on the overall purpose of the trust, it may also be legally modified.

Some trusts exist during the grantor’s life. These are called an inter vivos trust. Other types of trusts are triggered by the grantor’s death, which are called testamentary trusts. For example, irrevocable life insurance trusts are created to own a life insurance policy (or policies) while the insured person is alive. Irrevocable life insurance trusts are also designed to manage and distribute the funds that are paid out when the insured individual passes away. Of course, there are also other types of testamentary trusts that are not irrevocable life insurance trusts. Visit this website if you need irrevocable life insurance trusts.

Benefits of trusts

Although trusts require both time and money to create, they also provide many benefits. For example, a trust can be used to:

  • Determine how a person’s money should be used while they are alive or after their death.
  • Help avoid probate and taxes.
  • Protect assets from creditors.
  • Determine specific terms for beneficiaries who will inherit assets.
  • Ensure care for a physical and mentally disabled dependent.
  • Maintain privacy for personal and financial matters.

Despite the many benefits of establishing a trust, there are also some drawbacks, such as the need to file additional paperwork and keeping accurate written records if you transfer property in or out of the trust.

How to establish a trust

There are several different types of trusts, but an estate planning attorney can help you determine which is the best option for you or your family. Ask family and friends for recommendations and sit down with an attorney to discuss your personal and financial goals.

Read a similar article about elder law attorney here at this page.