I was recently asked this question by a friend and thought . . . you know, that’s a good question. There are many, many misconceptions about trusts (more on that topic in a future post). I think a lot of the misconceptions result from not truly knowing what a trust is, what you can do with them, and how they can benefit in almost any situation. So here we go . . .
A trust is an agreement – a contract – between the creator of the trust (often referred to as the Grantor or Settlor) and the trustee (an individual, group of people, or company). What do they agree? They agree that that the trustee will hold title to the creator’s assets for the benefit of the beneficiaries. Simple enough, right? The creator and the trustee agree that the trustee will hold title to the assets for the benefit of the beneficiaries.
There are a couple of major categories of trusts. The first major category is based on when the trust comes into existence. In this category there are living trusts and testamentary trusts. A living trust is created while you are living (wow – a term in the law that actually makes sense!), whereas a testamentary trust is contained in, and created by, the terms of your will (so it becomes effective after you are dead). When considering a testamentary trust, keep in mind that you give up one of the main benefits of a trust – bypassing probate – by choosing a testamentary trust. Because it is contained in your will and does not become effective until your will is probated, it reasons that your assets will still go through the probate (court) process.
The second major category deals with the ability to change the trust after you create it. In this category there are revocable trusts and irrevocable trusts. Simply put, a revocable trust is one that can be revoked by the creator of the trust (typically while he or she is still living), and an irrevocable trust is one that cannot be revoked. A revocable trust typically allows the creator to change the trust as well (rather than completely revoking it). One additional misconception to note – you do not give up control of your assets in the typical revocable living trust arrangement. Why? Because you are the creator, the trustee, and the beneficiary. In that case, having all the roles means that you aren’t giving up the control.
These different types of trusts are not mutually exclusive of each other, so for example, you could have a revocable living trust, or an irrevocable living trust, or a revocable living trust that later becomes irrevocable (usually when the creator of the trust dies). The only one that would really tough to have is a revocable testamentary trust . . . it’s awfully tough to revoke something if you are dead. The most important thing to remember is to have the appropriate assets properly titled in the name of your trust, no matter what type of trust you have.
So there you have it – a brief explanation of trusts. You likely are wondering why you should chose a trust over a will – or as I typically get asked, a “simple will.” I will answer that question in my next couple of posts. Please let me know if you have any questions!