Understanding Trusts: What They Are, Types of Trusts, & Beneficiaries
A trust is a powerful estate planning tool that lets you place your assets into the hands of someone you trust–known as the trustee. The trustee manages these assets for the benefit of your beneficiaries. Those beneficiaries eventually receive the assets exactly as you’ve instructed. Trusts are significant in estate planning because they offer greater control, privacy, and flexibility than a standard will.
But how do trusts work, and which type is the best for you? Below, we’ll explore everything you need to know about trusts.
What is a Trust, and How Does it Work?
Think of a trust as a roadmap to manage and protect your assets. There are three key roles to keep in mind:
- Grantor
- Trustee
- Beneficiaries
We will explore how these roles work later on. For now, here are the basics:
First, you, the grantor, transfer assets into the trust itself. These may include property, investments, or savings accounts. The trustee oversees these assets to ensure the beneficiaries receive them according to your instructions.
Key Players in a Trust: Trustee vs Beneficiary vs Grantor
There are three important roles in trusts: the grantor creates the trust, the trustee manages it, and the beneficiary receives benefits. Knowing who does what ensures everything goes according to plan.
What is a Trustee?
You choose a trustee to manage the trust’s assets and follow your instructions. Their primary responsibility is to protect the assets and distribute them according to your wishes. Trustees have legal obligations to act in the best interest of beneficiaries, keep accurate records, and manage the assets wisely.
Beneficiaries: Who Benefits in a Trust?
Beneficiaries are the people or organizations chosen to benefit from the trust. They don’t manage their trust, but they have certain rights. One of these rights includes receiving updates about the trust’s management and distributions. Beneficiaries rely on the trustee to follow the grantor’s instructions carefully to get the assets or funds intended for them.
Grantor: Setting the Trust Terms
The grantor creates and funds the trust. They determine the rules, select the trustee, and name beneficiaries. The grantor transfers assets like property, money, or investments into the trust, clearly outlining how these assets should be managed and distributed. Essentially, the grantor designs a personalized roadmap that guides the trustee handling their estate.
Types of Trust Explained
Trusts aren’t one-size-fits-all, and choosing the right type depends on your goals. Focus on what’s important to you: flexibility, asset protection, or tax advantages. Some trusts can be changed over time, while others are set in stone.
Revocable Trusts
A revocable trust, also called a living trust, gives you control and flexibility. You can make changes, add or remove assets, or even revoke them entirely during your lifetime. This trust avoids probate, making it easier for your beneficiaries to receive their inheritance. Since you still own the assets in the trust, they’re included in your taxable estate. A revocable trust is a good option if you want to keep control while simplifying the transfer of assets later.
Irrevocable Trusts
An irrevocable trust is more permanent. Once you create it, you can’t change or cancel it. The benefit? Assets placed in an irrevocable trust are no longer considered part of your estate, which can lower estate taxes and protect them from creditors. This trust is often used for tax planning or shielding assets from legal claims. However, because you give up direct control, it’s important to consider all factors before choosing this option.
Testamentary Trusts
A testamentary trust is created through your will and only takes effect after you pass away. It’s a useful tool for ensuring assets are managed properly for children, dependents, or beneficiaries who may need financial oversight.
Since this trust is part of your will, it goes through probate, allowing you to control when and how assets are distributed. A testamentary trust is wise if you want to provide for loved ones over time rather than in a lump sum.
Benefits and Disadvantages of Setting Up a Trust
Trusts offer various advantages but are not the right solution for everyone. While they can protect assets and simplify estate planning, they also come with costs and responsibilities. Let’s look at the benefits and potential drawbacks of establishing trust.
Advantages of Trusts
A trust can make estate planning seamless and more secure:
- Asset Protection: Assets placed in certain trusts can be protected from creditors or legal claims.
- Avoiding Probate: A trust allows assets to pass directly to beneficiaries without going through the lengthy probate process.
- Privacy: Unlike a will, a trust keeps financial details private and out of public records.
- Control Over Asset Distribution: You can set specific rules for when and how beneficiaries receive their inheritance.
- Tax Planning: Some trusts reduce estate taxes, preserving more wealth for beneficiaries.
Potential Disadvantages
Despite the benefits, trusts also have some downsides to consider:
- Involvement: Setting up and managing a trust requires careful planning and legal documentation.
- Costs: These are upfront costs for creating a trust and ongoing expenses for management and administration.
- Management Responsibility: The trustee has a legal duty to manage the trust properly, which is a big responsibility.
Every estate is different. It’s important to weigh these factors carefully. If you’re unsure whether a trust is right for you, consider scheduling a call with us to explore your options.
Your Step-by-Step Guide for Setting Up a Trust
Setting up a trust takes careful planning, but the process is straightforward with the right guidance. Here’s a step-by-step breakdown of how to create a trust:
- Define Your Goals: Decide why you want a trust. Are you looking to avoid probate, protect assets, or plan for taxes? Knowing your priorities will determine the right type of trust.
- Choose the Type of Trust: Based on your goals, select a trust that fits your needs, such as a revocable, irrevocable, or testamentary trust.
- Select a Trustee: Pick someone responsible and trustworthy to manage the assets. This can be an individual, a professional fiduciary, or a financial institution.
- Name Your Beneficiaries: Decide who will receive the assets in the trust and under what conditions. You can also set up rules for distribution over time.
- Draft the Trust Document: Work with an estate planning attorney to create the legal document that outlines the terms of the trust.
- Fund the Trust: Transfer assets into the trust, such as real estate, investments, or bank accounts. Without funding, the trust won’t be effective.
- Maintain and Update as Needed: Review your trust periodically to ensure it aligns with your goals and make necessary adjustments.
Since every situation is unique, consulting an estate planning professional can ensure your trust is set up correctly and meets your long-term goals.
What Happens to a Trust After Someone Dies?
What happens to a trust after the grantor passes away depends on the trust they created. If it’s a revocable trust, it typically becomes irrevocable, meaning no further changes can be made. The trustee then manages the trust and distributes the assets according to the grantor’s instructions.
The trustee’s responsibilities may include:
- Notifying Beneficiaries: Letting them know about the trust and what they’re entitled to.
- Paying Outstanding Debts or Taxes: Settling any remaining financial obligations before distributing assets.
- Managing or Distributing Assets: Transfer property, funds, or other assets to beneficiaries as the trust terms outline.
Trusts bypass probate, so this process is often simple and faster than handling an estate through a will. However, a trustee still has a legal duty to carefully follow the trust’s terms. If you’re a trustee or beneficiary and are unsure of the next steps, seeking professional guidance ensures everything is handled properly.
Take the Next Step – Talk to an Expert Today!
A trust can be a powerful tool for protecting assets, avoiding probate, and ensuring your wishes are carried out. But choosing the right type of trust and setting it up properly requires careful planning. Expert guidance makes all the difference.
An experienced advisor can help you navigate the options, tailor a trust to your needs, and ensure everything is legally sound. Ready to take the next step? Schedule a call today to discuss your estate planning goals with a Savvy expert.
Dan grew up in the Chicago area and developed a strong interest in the stock market. After completing his bachelor's degree in business administration with concentrations in finance and information systems from Fordham University's Gabelli School of Business in New York City, he embarked on his career at Eze Software Group, a financial technology company and electronic trading software. Starting in client service, he steadily progressed to consulting and implementation roles, where he directly interacted with traders, portfolio managers, and operations personnel at institutional trade desks. During his time at Eze., he had the pleasure of meeting his wife, Jess. Together, they decided to relocate to Bellingham, Washington, to be closer to her family. This prompted his transition to Merrill, where he served as a financial advisor, gained valuable experience, before eventually managing a local independent advisory office in Bellingham. His specialization is to help individuals in our community achieve their retirement goals. For those approaching retirement, his focus is on implementing effective savings and contribution strategies. For those already in retirement, he prioritizes sustainable and tax-efficient income strategies. Collaborating closely with clients' tax professionals is crucial to ensure that our investment advice aligns seamlessly with their unique tax situations.
Material prepared herein has been created for informational purposes only and should not be considered investment advice or a recommendation. Information was obtained from sources believed to be reliable but was not verified for accuracy. All advisory services are offered through Savvy Advisors, Inc. (“Savvy Advisors”), an investment advisor registered with the Securities and Exchange Commission (“SEC”).
Understanding Trusts: What They Are, Types of Trusts, & Beneficiaries
A trust is a powerful estate planning tool that lets you place your assets into the hands of someone you trust–known as the trustee. The trustee manages these assets for the benefit of your beneficiaries. Those beneficiaries eventually receive the assets exactly as you’ve instructed. Trusts are significant in estate planning because they offer greater control, privacy, and flexibility than a standard will.
But how do trusts work, and which type is the best for you? Below, we’ll explore everything you need to know about trusts.
What is a Trust, and How Does it Work?
Think of a trust as a roadmap to manage and protect your assets. There are three key roles to keep in mind:
- Grantor
- Trustee
- Beneficiaries
We will explore how these roles work later on. For now, here are the basics:
First, you, the grantor, transfer assets into the trust itself. These may include property, investments, or savings accounts. The trustee oversees these assets to ensure the beneficiaries receive them according to your instructions.
Key Players in a Trust: Trustee vs Beneficiary vs Grantor
There are three important roles in trusts: the grantor creates the trust, the trustee manages it, and the beneficiary receives benefits. Knowing who does what ensures everything goes according to plan.
What is a Trustee?
You choose a trustee to manage the trust’s assets and follow your instructions. Their primary responsibility is to protect the assets and distribute them according to your wishes. Trustees have legal obligations to act in the best interest of beneficiaries, keep accurate records, and manage the assets wisely.
Beneficiaries: Who Benefits in a Trust?
Beneficiaries are the people or organizations chosen to benefit from the trust. They don’t manage their trust, but they have certain rights. One of these rights includes receiving updates about the trust’s management and distributions. Beneficiaries rely on the trustee to follow the grantor’s instructions carefully to get the assets or funds intended for them.
Grantor: Setting the Trust Terms
The grantor creates and funds the trust. They determine the rules, select the trustee, and name beneficiaries. The grantor transfers assets like property, money, or investments into the trust, clearly outlining how these assets should be managed and distributed. Essentially, the grantor designs a personalized roadmap that guides the trustee handling their estate.
Types of Trust Explained
Trusts aren’t one-size-fits-all, and choosing the right type depends on your goals. Focus on what’s important to you: flexibility, asset protection, or tax advantages. Some trusts can be changed over time, while others are set in stone.
Revocable Trusts
A revocable trust, also called a living trust, gives you control and flexibility. You can make changes, add or remove assets, or even revoke them entirely during your lifetime. This trust avoids probate, making it easier for your beneficiaries to receive their inheritance. Since you still own the assets in the trust, they’re included in your taxable estate. A revocable trust is a good option if you want to keep control while simplifying the transfer of assets later.
Irrevocable Trusts
An irrevocable trust is more permanent. Once you create it, you can’t change or cancel it. The benefit? Assets placed in an irrevocable trust are no longer considered part of your estate, which can lower estate taxes and protect them from creditors. This trust is often used for tax planning or shielding assets from legal claims. However, because you give up direct control, it’s important to consider all factors before choosing this option.
Testamentary Trusts
A testamentary trust is created through your will and only takes effect after you pass away. It’s a useful tool for ensuring assets are managed properly for children, dependents, or beneficiaries who may need financial oversight.
Since this trust is part of your will, it goes through probate, allowing you to control when and how assets are distributed. A testamentary trust is wise if you want to provide for loved ones over time rather than in a lump sum.
Benefits and Disadvantages of Setting Up a Trust
Trusts offer various advantages but are not the right solution for everyone. While they can protect assets and simplify estate planning, they also come with costs and responsibilities. Let’s look at the benefits and potential drawbacks of establishing trust.
Advantages of Trusts
A trust can make estate planning seamless and more secure:
- Asset Protection: Assets placed in certain trusts can be protected from creditors or legal claims.
- Avoiding Probate: A trust allows assets to pass directly to beneficiaries without going through the lengthy probate process.
- Privacy: Unlike a will, a trust keeps financial details private and out of public records.
- Control Over Asset Distribution: You can set specific rules for when and how beneficiaries receive their inheritance.
- Tax Planning: Some trusts reduce estate taxes, preserving more wealth for beneficiaries.
Potential Disadvantages
Despite the benefits, trusts also have some downsides to consider:
- Involvement: Setting up and managing a trust requires careful planning and legal documentation.
- Costs: These are upfront costs for creating a trust and ongoing expenses for management and administration.
- Management Responsibility: The trustee has a legal duty to manage the trust properly, which is a big responsibility.
Every estate is different. It’s important to weigh these factors carefully. If you’re unsure whether a trust is right for you, consider scheduling a call with us to explore your options.
Your Step-by-Step Guide for Setting Up a Trust
Setting up a trust takes careful planning, but the process is straightforward with the right guidance. Here’s a step-by-step breakdown of how to create a trust:
- Define Your Goals: Decide why you want a trust. Are you looking to avoid probate, protect assets, or plan for taxes? Knowing your priorities will determine the right type of trust.
- Choose the Type of Trust: Based on your goals, select a trust that fits your needs, such as a revocable, irrevocable, or testamentary trust.
- Select a Trustee: Pick someone responsible and trustworthy to manage the assets. This can be an individual, a professional fiduciary, or a financial institution.
- Name Your Beneficiaries: Decide who will receive the assets in the trust and under what conditions. You can also set up rules for distribution over time.
- Draft the Trust Document: Work with an estate planning attorney to create the legal document that outlines the terms of the trust.
- Fund the Trust: Transfer assets into the trust, such as real estate, investments, or bank accounts. Without funding, the trust won’t be effective.
- Maintain and Update as Needed: Review your trust periodically to ensure it aligns with your goals and make necessary adjustments.
Since every situation is unique, consulting an estate planning professional can ensure your trust is set up correctly and meets your long-term goals.
What Happens to a Trust After Someone Dies?
What happens to a trust after the grantor passes away depends on the trust they created. If it’s a revocable trust, it typically becomes irrevocable, meaning no further changes can be made. The trustee then manages the trust and distributes the assets according to the grantor’s instructions.
The trustee’s responsibilities may include:
- Notifying Beneficiaries: Letting them know about the trust and what they’re entitled to.
- Paying Outstanding Debts or Taxes: Settling any remaining financial obligations before distributing assets.
- Managing or Distributing Assets: Transfer property, funds, or other assets to beneficiaries as the trust terms outline.
Trusts bypass probate, so this process is often simple and faster than handling an estate through a will. However, a trustee still has a legal duty to carefully follow the trust’s terms. If you’re a trustee or beneficiary and are unsure of the next steps, seeking professional guidance ensures everything is handled properly.
Take the Next Step – Talk to an Expert Today!
A trust can be a powerful tool for protecting assets, avoiding probate, and ensuring your wishes are carried out. But choosing the right type of trust and setting it up properly requires careful planning. Expert guidance makes all the difference.
An experienced advisor can help you navigate the options, tailor a trust to your needs, and ensure everything is legally sound. Ready to take the next step? Schedule a call today to discuss your estate planning goals with a Savvy expert.
Meet
Dan Perrino
Dan grew up in the Chicago area and developed a strong interest in the stock market. After completing his bachelor's degree in business administration with concentrations in finance and information systems from Fordham University's Gabelli School of Business in New York City, he embarked on his career at Eze Software Group, a financial technology company and electronic trading software. Starting in client service, he steadily progressed to consulting and implementation roles, where he directly interacted with traders, portfolio managers, and operations personnel at institutional trade desks. During his time at Eze., he had the pleasure of meeting his wife, Jess. Together, they decided to relocate to Bellingham, Washington, to be closer to her family. This prompted his transition to Merrill, where he served as a financial advisor, gained valuable experience, before eventually managing a local independent advisory office in Bellingham. His specialization is to help individuals in our community achieve their retirement goals. For those approaching retirement, his focus is on implementing effective savings and contribution strategies. For those already in retirement, he prioritizes sustainable and tax-efficient income strategies. Collaborating closely with clients' tax professionals is crucial to ensure that our investment advice aligns seamlessly with their unique tax situations.
Material prepared herein has been created for informational purposes only and should not be considered investment advice or a recommendation. Information was obtained from sources believed to be reliable but was not verified for accuracy. All advisory services are offered through Savvy Advisors, Inc. (“Savvy Advisors”), an investment advisor registered with the Securities and Exchange Commission (“SEC”).
