Financial Fitness

What is a Trust, and Why Should I Care?

by Erik Neilson

The term “trust fund” has become part of common dialect over the years, thanks in large part to those who have benefited from them. This being said, there’s quite a bit of mystery surrounding trusts and what they actually are. A trust is really a legal agreement among one or more parties that divides the economic, or beneficial, ownership of property from the legal ownership.  The trust beneficiaries are the economic owners, and the trustee is the legal owner, or the property in the trust fund. So, why exactly should you care about setting up a trust? Many reasons, actually. 

First, let’s take a closer look at who is involved in setting up a trust, and what it means for each party. 

The Trust Arrangement

Setting up a trust arrangement typically requires agreement between two individuals—the settlor (he or she whose property will be handled) and the trustee (usually a mutual third party, but sometimes the settlor is also the trustee.  In addition, the trust will have one or more beneficiaries, but they don’t have to agree to the arrangement (or even know about it right away in some cases). Essentially, the settlor creates the trust, the trustee manages the property in the trust fund and the beneficiary (or beneficiaries) are entitled to eventually receiving the property titled in the trust’s name. 

Revocable vs. Irrevocable Trusts

There are a variety of different types of trust agreements that can be made, but a major differentiating element is whether the trust is revocable or irrevocable. A revocable trust—also known as a “living trust”—tends to be flexible, allowing the settlor to dissolve the agreement at any time should circumstances change. Irrevocable trusts are another story. Once established, an irrevocable trust’s terms are largely set in stone and can only be changed in very limited circumstances.

The two types of trusts serve different functions.

Irrevocable trusts tend to used for two main reasons: tax planning and creditor protection. If structured correctly, the growth in value of assets transferred to the trust, as well as life insurance proceeds on policies owned by the trust, can be exempt from estate tax. Trust assets may also be protected from creditor claims against the settlor.

On the flipside, a revocable trust can function much like a Last Will – handling estate planning related items, such as holding homes and certain property to be distributed after your passing according to your wishes.

The Benefits of Setting Up a Trust Agreement

It may seem as if a trust is an unnecessary component to handing off property to a relative or other beneficiary, but there are plenty of benefits that come along with setting up such an agreement. A trust provides the settlor with peace of mind in that he or she can specify how their wealth should be distributed even after they pass away. And, once they become irrevocable, trust arrangements may also protect the trust fund from creditors – helping to preserve one’s legacy. 

Finally, with a revocable trust, assets transferred into the trust are still available during the settlor’s lifetime but can avoid the probate process after death. This results in saved time and money, not to mention additional privacy. Court fees and taxes can be substantial otherwise, making this one of the main reasons why people consider setting up a trust.

Next Steps

At the end of the day, the best way to determine whether or not your financial situation is right for setting up a trust is to work with an experienced financial advisor. Creating a trust can be a complex matter, and details can vary depending upon state law. The guidance of an attorney can be highly beneficial, especially if he or she has extensive estate planning expertise. 

Take the right steps, and a trust can help to preserve your legacy while also creating a sound financial future for your beneficiaries.

And, remember, Tomorrow is not a law firm, this blog was not written by a lawyer, and we do not provide legal advice. When in doubt, talk to a licensed attorney in your area.