It is important to realize that changes may occur in this area of law. This information is not intended to be legal advice regarding your particular problem, and it is not intended to replace the work of an attorney.
When you create a trust, you have someone else, called a trustee, take over and manage your money, real estate or other kinds of assets for the benefit of a third person, called a beneficiary. As the trustor, you can set up a revocable trust, which allows you to make changes later on, or an irrevocable trust that cannot be changed.
There are different kinds of trusts, which serve different purposes. Among the most common types are: trusts for the support of minor or disabled children after the deaths of their parents; trusts designed to avoid or minimize involvement with probate court; and trusts designed to minimize tax liability when you want to make a gift to a beneficiary.
A trust for the benefit of minor or disabled children often takes effect when both parents have died or become unable to continue caring for the child themselves. It is usually set up to provide for the support, care and education of your children until they have reached the age set by you (their parents) to actually receive the assets being held by the trustee. This kind of trust can allow the trustee to manage funds for your disabled child throughout your child’s lifetime.
When parents die without creating a trust for their children, a probate court will appoint a conservator to handle the children’s financial needs. Conservators are restricted by law and must be bonded. They must file an annual report with the probate court, explaining how they have used the money on behalf of the children.
Another common type of trust is known as a “revocable living trust.” This is an alternative to a will. As trustor, you can cancel or change a revocable living trust throughout your life — just as you could change a will. You do not have to name a trustee to handle a revocable living trust. You can manage the funds or other assets yourself. Your trust can name someone else to act as trustee in case you later lose the ability to manage the trust. Like a will, a revocable living trust gives instructions as to how the your assets are to be distributed at your death.
In the right set of circumstances revocable living trusts may be more desirable than wills, but they are not the right choice for all people in all situations. A revocable living trust can sometimes avoid the need for your estate to go through the court’s probate process after your death. One common misconception is that a revocable living trust saves death taxes. This is not true. The assets of a revocable living trust are subject to federal and state death taxes in exactly the same way as the assets passing under the terms of a will.
A trust is irrevocable if it cannot be changed or terminated, even during the life of the trustor. With irrevocable trusts, the trustor cannot be the trustee. Some types of irrevocable trusts may reduce death taxes, and, in some cases, can save income taxes.
Trusts are complex legal documents and not appropriate in all situations. Before establishing a trust you should seek legal advice. If you have questions, or need more information about trusts, contact an attorney who is knowledgeable on trust and estate planning matters.
Legal editor: Janay Haas, November 2009