A trust is a fiduciary relationship in which one party, known as a grantor, settlor, or trustor, gives another party, known as a trustee, the right to hold title to assets for the benefit of a third party, known as the beneficiary. Interestingly, oftentimes the grantor, trustee, and beneficiary are the same person (the creator of the trust). That is because the trust is initially created by you, to be managed by you, and for your benefit. Only upon the grantor’s death or incapacity, another person designated by the grantor becomes a successor trustee and manages the trust for the benefit of another beneficiary also designated by the grantor.
A living trust, also known as an inter vivos trust, benefits the grantor during his or her lifetime. Assets are transferred to the trust, and the grantor, trustee, and beneficiary are, again, often the same person. A testamentary trust is created through a person’s Last Will and assets are only transferred to the trust when the grantor dies. A revocable trust can be changed by the grantor during his or her lifetime. An irrevocable trust cannot be changed once it is established. A living trust can be revocable or irrevocable. A testamentary trust can only be irrevocable. Special types of trusts can be used to address a variety of estate planning issues like special needs, taxation, or inheritance control.
A living trust is created by signing a written trust agreement and then transferring property to the trustee. The trust agreement must identify the name of the trust, the initial trustee, and the beneficiaries, but typically it also includes other terms for the trustee to follow based on the grantor’s goals in setting up the living trust. The trust agreement does not need to be filed with any institution and there are no special fees.
In order for the trust to exist and be effective, one’s property must be transferred to the trustee of the trust. This is called “funding the trust.” Typically, the trust creator in his or her capacity as trustee will hold the title to the assets. Titled property such as real property, bank and investment accounts, or motor vehicles are transferred to trust by changing the name on the title to the name of the trustee of the trust. The process for changing the name on the title is similar to selling the asset to a third party. Personal property that does not have a title is simply transferred by an assignment of all tangible property to the trustee. Some assets like life insurance policies or retirement accounts, do not need to be transferred to the trust. Instead, a beneficiary can be designated. It is important to remember a living trust is not fully created or valid until the property is transferred into it.
Contrary to common misconception, the trust is not only for wealthy people. It is a valuable estate planning tool for many families. Properly created, structured, and funded, a living trust provides various benefits that make it the most efficient way to pass assets to beneficiaries.
Natalia Vander Laan is a Minden attorney