A trust is a legal entity created by the trustor. The trustor transfers his or her property to the trustee, and the trustee manages the trustor’s property and assets for the benefit of the person who receives them. The person(s) or entity that ultimately receives the trust property is called the beneficiary. Essentially, a trust is a type of financial arrangement between the three parties that hold the assets for the beneficiary or beneficiaries.
The Parts of a Trust
There are three parties involved with a trust. These include:
- The trustor: This is the person who gives the trustee control over their property, estate and assets and who creates the original agreement.
- The trustee: The person responsible for managing the trust for the benefit of the beneficiaries. The trustee is appointed by the trustor and can be an individual or a business entity.
- The beneficiary: These are the people who actually receive the benefits provided by the trust.
There are several ways a trust can be used. It can be used to manage the trustor’s assets during their life, or after they pass away. There are also several different types of trusts to choose from based on the trustor’s needs.
Two Main Types of Trusts: Revocable and Irrevocable
Although there are myriad trusts that may be included in an estate plan, all trusts generally fall in one of the following categories: revocable or irrevocable.
The Revocable Trust
The revocable trust is one that can be changed, altered or terminated while the trustor is still alive. In many cases, this type of trust is created to transfer assets outside of the probate process. A revocable trust also allows the trustor to retain a significant amount of control over the trust property during the trustor’s lifetime.
Typically with a revocable trust, the trustor is also the trustee and beneficiary, though there may be additional beneficiaries such as the trustor’s spouse or children. When the trustor dies, the successor trustee – who is also appointed by the trustor in the trust document – takes control of the trust property and administers the trust for the remaining beneficiaries.
Also, once the trustor dies, the revocable trust becomes irrevocable. This may seem confusing at first, but it makes sense. Once the trustor passes away, it would be quite difficult for the trustor to make changes to the trust document.
The Irrevocable Trust
The other common type of trust is the irrevocable trust. An irrevocable trust may not be changed, altered, amended or terminated by the trustor during his or her lifetime. And, like a revocable trust, an irrevocable trust will continue in existence for the benefit of the trust’s beneficiaries after the trustor dies.
Unlike a revocable trust, though, the trustor and trustee generally cannot be the same person. And once the trustor’s assets are transferred to the trustee of an irrevocable trust, the trustor relinquishes all control over the assets. The benefit, however, is that the assets of an irrevocable trust are not included in the trustor’s estate for estate tax purposes.
Keep in mind, a professional like The KC Estate Planner will be able to help you determine the types of trusts that are right for your situation. While the revocable and irrevocable trust options are the most common, there are others to consider, as well. Being aware of the options you have is the best way to ensure you properly plan for your estate now, and in the future.