What is a Trust?

First of all, what is a trust? A trust is simply written instructions by someone called a "Settlor" (the person setting up the trust) to a "Trustee" (the trusted money manager) calling for the investment of assets (the "Trust Estate") for the benefit of someone (the "Beneficiary").

"Settlor" sets it up

Trust = Instructions

Trustee = Trusted money manager

Beneficiary enjoys the money

The best way to describe a trust is to give an example of a trust in action:

Parents often wish to make arrangements so that on their passing their children are provided for, without having money pass directly to them while they are young. Such parents can establish trusts which will invest assets, pay out money for the expenses of rearing young children, eventually pay for college, and then distribute trust assets when children are older and more experienced with finances.

Types of trusts - "living" vs. "testamentary"

Trusts can be set up during life ("living trusts") so that they can be used immediately, or they can be established through the provisions of a will ("testamentary trusts"). Most modern estate plans use living trusts.

Typical "living" trust structure

Each trust requires a "Trustee." These days there are many professional corporate trustees available, such as those affiliated with banks, stock brokers and other financial institutions. Many clients, however, desire to manage their own trusts for as long as possible to avoid paying Trustee fees. Thus, in the typical estate plan of a married client, the client forms a living trust, transfers his or her assets into the trust and then acts as co-Trustee of the trust along with the spouse:

Disability plan

The back-up Trustee becomes Trustee on the death or disability of the Settlor and the spouse. This is a nice management device that avoids guardianship proceedings if the Settlor were to experience a health problem and become infirm. This allows the other spouse to act as sole Trustee, in the event of a disability, while still having a corporate trustee in reserve.

Avoiding "Probate"

Trusts don't die, people do. Thus, even though the Settlor of a trust has passed on, a Trust holding the Settlor's assets continues. One of the instructions in the living trust to the back-up Trustee is what to do with assets on the Settlor's death. Sometimes assets are simply distributed outright to a spouse, or to mature children and in this case the living trust is simply a substitute for a will - a substitute that avoids Probate. There is no reason to involve the Probate Court in the transfer of assets, where all of a decedent's assets are owned by his or her trust. The savings is considerable.

Making long term special arrangements for loved ones

Sometimes on death the Settlor has provided for the continued management by the trustee of trust assets for the benefit of children or a spouse. Oftentimes a trust is set up for children so that childhood expenses are paid for, college is taken care of and then a distribution of assets is made to children in stages when they have some life experience, say at ages 30, 35 and 40.

Speed and privacy

On someone's passing, the surviving Trustee usually is in a position to quickly make the transfers called for in the trust. A typical Probate estate will remain open for at least one year.

Probate matters are a matter of public record. A living trust is an entirely private document.

"Revocable" trust can be undone

A living trust is revocable, which means it can be changed at any time. Even after you execute your will, your trust can be modified without having to change your will.