A trust is a legal title to property held by one party for the benefit of another. There are many different varieties, but objectives for the most common types of trusts are to reduce estate tax liability, to protect property in your estate, and to avoid probate.
There are three parties to a trust. The trustor is the person setting up the trust, the beneficiary is the person who will receive the benefits of the trust, and the trustee is the person responsible for managing the property in the trust. Different types of trusts can be set up by the trustor for different objectives, but he must always abide by rules inherent in the type of trust he has chosen, and by state and federal law.
When a trust is created, the trustee manages the assets of the trust for the beneficiary. If the trust created is revocable then the trustor can make changes to it later on, but if it is irrevocable he cannot. A trust for support of minor children after the death of their parents is a common type of trust. Also common are trusts designed to avoid involvement with a probate court, and trusts designed to minimize tax liabilities.
A common type of trust that is an alternative to a will is a “revocable living trust.” As the name suggests, it can be changed during the trustor’s lifetime. Also, the trustor can manage the assets of this type of trust himself; he does not need to appoint a trustee. Like a will, a revocable living trust gives instructions about how assets are to be distributed at death. Although sometimes this type of trust can prevent the need for the estate to be probated after death, its assets are still subject to state and federal taxes.
Some types of irrevocable trusts can be used to remove the value of the property from the trustor’s estate so that the property can’t be taxed when he dies. Since the person who transfers assets into an irrevocable trust no longer legally owns that property, it also cannot be taxed when the person dies. Irrevocable trusts require the appointment of a trustee; the trustor may not manage the assets of an irrevocable trust himself.
For information and questions about trusts, legal advice should be sought from an attorney who is knowledgeable about estate planning issues.