What is a trust?
Let’s talk about trusts! What is a trust? What does it do?
Let’s break it down
Before we talk about what a trust can and cannot do, let’s think of it in more of a conceptual way. A trust essentially has 3 parts – The grantor. The beneficiary. The trustee.
The Grantor
The grantor is the person that has something to give.
The Beneficiary
The beneficiary is the person that receives something.
The Trustee
The trustee is the one who carries out the trust. It is the trustee’s responsibility to follow the rules as they are outlined. With this responsibility, however, they will need to make some decisions on how this gets done (more on this in a later post!)
Example
Let’s say you have a big beautiful beach-front home that you would like to eventually give to your daughter. You can’t put it in her name right now because you are currently living in it, right?!
So, you need to put it into a trust and decide the rules on when it will transfer to her name. Do you want it in her name the moment you pass? When she turns 35? Once she finishes college? These are the rules you need to lay out.
BUT — you will be gone when this happens! So you need someone else to make sure that the home transfers to your daughters name, when you intend for her to have it.
So, conceptually speaking, a trust is when somebody (the grantor) wants to give something to another person (the beneficiary) through the use of a trust vehicle, with someone else helping to make the decisions (the trustee).
Easy right?
Let’s dive deeper.
There are many different types of trusts out there and each type can do different things. When it comes to trusts though, there are two key terms to understand: revocable and irrevocable.
Revocable Trusts
These trusts can be modified. With a revocable trust, the grantor creates a trust during their lifetime and they retain the right to revoke (or amend) that trust at any point. As long as they allow themselves this power within the document, they have the right to make any changes as they see fit. Revocable trust = complete control.
Irrevocable Trusts
These documents CANNOT be changed. The grantor puts something into the trust and has outlined the rules, but no longer has the power to change these rules.
Why would anyone want to do this?!
The simple answer is that for some people there are tax benefits and forms of asset protection when trusts are laid out this way.
It is definitely more complicated than this, however, the gist of an irrevocable trust is that when a grantor relinquishes control of the asset they are giving, they are in return receiving some other type of benefit — usually related to taxes or asset protection.
In general, most of my clients use a revocable living trust. Once they pass away, the revocable trust then turns into an irrevocable one where no more changes are allowed. Their assigned trustee will then use this document to figure out how to make decisions about distributing your assets.
Trusts and Probate
All of this can be done outside of the probate process – one of the main benefits of using a trust!
Why do people want to avoid probate?
Time
Anytime there is a death, it will take some time to transfer the title of an asset from one person to another. The probate process extends this time. At a minimum, it will take at least 6 months, but more likely it could take up to a year to receive anything that is entitled to you in a will or by law after someone has passed.
Cost
Probate is expensive! An uncontested probate case will cost $4,000 - $6,000. If anyone fights over how things have been divided, the cost will be significantly higher.
Privacy
Once an estate goes through the probate process, it becomes public record – for the whole world to see! However, if the estate is listed in a trust, you can skip this part and everything remains private.
Sum It Up
A trust gives people options to avoid the probate process, which is why it is frequently used in estate planning.
Two common types of trusts are revocable trusts and irrevocable trusts.
When thinking about a trust conceptually, there are 3 things going on – the person with something to give, the person who is going to receive the gift, and the person who makes the decisions about how that gift is given out.
I hope you found this helpful!
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