What is A Trust?

A trust, sometimes called a trust fund or trust account, is a legal arrangement to ensure a person’s assets go to specific beneficiaries. The trust creator puts assets in the trust account and authorizes a trustee to administer those assets for the trust creator or beneficiaries. Some trusts can reduce estate taxes.

Trusts have three main players:

1. Grantor: The person who creates the trust and puts assets in it.
2. Beneficiary: A person who eventually receives some or all of the assets in the trust.
3. Trustee: The organization or person who administers the trust.

Types of Trusts:

You can tailor a trust to your needs. There are various types of trusts to choose from, but all trusts fall under two main categories.

1. Revocable trust

Revocable trusts, also called living trusts, are created during the grantor’s lifetime and are generally used for:

• Planning for incapacitation. If you’re diagnosed with a debilitating condition, you can get things in order before you’re unable to do so. When that day comes, the successor trustee manages the trust assets for you.
• Avoiding probate. Assets in a revocable trust can bypass probate, the time-consuming court process of settling an estate. Assets that pass-through probate become part of the public record, so bypassing probate can be beneficial if you prefer to keep the details of the trust private.

With a revocable trust, the grantor can change the beneficiaries and assets as long as they’re alive and physically and mentally able to do so. However, revocable trusts typically do not provide tax benefits or protection from creditors.

2. Irrevocable trusts

Irrevocable Trusts*: An irrevocable trust is one that the grantor cannot change or revoke. Exemptions can be made only under limited circumstances, and they are very difficult—all beneficiaries need to agree, or there must be a court decree. The grantor appoints a third party to be the trustee and manage the trust.

Once assets are transferred into the irrevocable trust, the grantor gives up ownership of those assets, which are removed from their taxable estate. Irrevocable trusts are often used as a vehicle to facilitate advanced tax planning and gifting for one’s estate.

Revocable vs. Irrevocable Trusts: Key differences

The biggest difference between revocable trusts and irrevocable trusts is that a revocable trust's terms and stipulations can be modified at any time, whereas an irrevocable trust's terms can't be changed after set up unless all beneficiaries agree.