Trusts are some of the most powerful tools in estate planning. They can be set up to achieve many purposes, including protecting personal assets, avoiding taxes, providing for vulnerable loved ones, or providing funds for a charitable cause. Trusts can even go into effect during your lifetime. In this post, we will briefly discuss living trusts.
A trust is a way of dividing ownership in property. The person who sets up the trust is known as the grantor, or sometimes in Minnesota law as the settlor. A trustee oversees the property in the trust, managing it for the benefit of the named beneficiaries. The trust document itself lays out the terms of how this will work.
For instance, imagine the property in a trust consists of an investment account. A trustee is named to manage the account and write checks to the beneficiaries at regular intervals. This is a fairly common arrangement for trusts, whether they are living trusts or go into effect upon the grantor’s death. Compared to simply giving a large sum of money to the beneficiaries, this arrangement has several advantages. It can avoid certain tax penalties, and helps insure that the money is well managed. It also provides the opportunity for some control. For instance, in some cases a trust can specify that the beneficiaries must continue their education, or meet some other criteria in order to receive their shares.
In a trust established during lifetime (commonly referred to as a “living trust”), the grantor sets up the trust to go into effect during his or her lifetime. In some cases, a parent may set up a trust that names the parent as the trustee and children as beneficiaries. In other cases, the parent may want to name a professional or a trusted friend as the trustee.
Living trusts can be revocable or irrevocable. Revocable trusts are the most common arrangement. They allow the grantor to make changes to the trust as needed. In one typical type of revocable trust, the grantor names himself or herself as the beneficiary. The trust instructs the trustee to oversee the property and pay the property’s income to the beneficiary for life. After the beneficiary dies, the assets go to the successor beneficiaries named in the trust. The main advantage of this type of trust is that the property does not have to go through the time and expense of probate before assets go to the next generation.
As its name implies, an irrevocable trust cannot be changed while the grantor is alive. This type of trust can be an effective way of avoiding estate taxes for large estates.
As you might have gathered from this brief introduction, trusts can be adapted for many purposes, each with it advantages and disadvantages. It’s up to you what you want a trust to do, or whether you want one at all. However, everyone should have some type of estate plan.