[Video] Estate-Planning 101 - What is a Trust?
1. What is a Trust?
A trust is a legal entity that can own title to property. The trust is established by a settlor (the person who transfers property to the trust) for the benefit of the settlor and/or other beneficiaries. A trustee appointed by the settlor manages the property according to the terms of the trust. A settlor can serve as the trustee under many trust agreements. A trust is a way to separate legal title for property from the individuals or entities who receive the benefits of the property.
2. Who Needs a Trust?
Because trusts accomplish many different goals, almost anyone can benefit from a trust. For example, a Special Needs Trust can provide benefits for a person with a disability while protecting the person’s eligibility for government aid. A trust can protect the property of minors when their parents pass away until the minors are adults. Trust agreements can also avoid probate, protect assets from creditors, reduce or eliminate estate taxes, and avoid the need for guardians and conservators. Parents and high-net-worth individuals often benefit from using trusts as part of their estate plan.
3. Does a Trust Replace a Will?
No, a trust does not replace a will. Some assets cannot be transferred to a trust. There are also situations in which a trust would not be cost-effective or accomplish the same estate-planning goals as a will. Everyone needs a will to ensure that any property not titled in a trust, held jointly with right of survivorship, or has a beneficiary designation does not become subject to intestate laws.
4. Are there different kinds of trusts?
Yes, there are many different types of trust agreements. Various types of trusts accomplish different goals and may meet specific needs. The two basic types of trust agreements are revocable and irrevocable. A revocable trust can be changed or canceled by the settlor before the settlor’s death or incapacitation. However, a revocable trust does not provide the same level of asset protection or tax benefits as an irrevocable trust. An irrevocable trust cannot be changed once the settlor funds the trust, except in very specific and rare cases.
5. How do I fund a trust?
Transferring assets to the trust is referred to as “funding” the trust. How a person transfers an asset to the trust depends on the type of asset being transferred. To transfer a vehicle or real estate to the trust, the settlor signs a need title or deed transferring the property into the legal name of the trust. Cash and liquid assets can be deposited into a financial account in the trust name. Retirement accounts and life insurance policies may be transferred to a trust by naming the trust as the beneficiary.
