A trust is a relationship in which property is held by one person for the benefit of another person. A trust has three fundamental roles: settlor, trustee, and beneficiary. The settlor creates the trust and funds the trust with trust property. The trustee holds and manages trust property for the benefit of the beneficiaries. The beneficiaries benefit from trust property. Depending on the type of trust that is created, one person may hold all roles simultaneously or there may be a different person in each role.
Trusts may be created during life or at death. A trust that is created during life is called an inter vivos trust. An inter vivos trust may be revocable or irrevocable.
The most common trust is the revocable living trust, a type of inter vivos trust. The primary purpose of the revocable living trust is avoiding probate. Typically, in a revocable living trust, the settlor is also the initial trustee and beneficiary. Usually, after the settlor dies, a successor trustee distributes the trust property to contingent beneficiaries, who are often the settlor’s children and other relatives. As implied in the name, the revocable living trust may be revoked by the settlor during his or her lifetime. Thus, a settlor does not lose control over his or her assets by creating a revocable living trust.
An inter vivos trust that is irrevocable may be created for many purposes. For instance, irrevocable trusts are commonly created for asset protection or estate tax purposes. The critical difference with an irrevocable trust is that the settlor / beneficiary may not also be the trustee. In other words, the settlor must give up control of assets held and managed by the trust. However, the settlor may still be a beneficiary. There are additional limitations. The settlor cannot be the sole beneficiary of the trust, and the settlor cannot reserve himself or herself a guaranteed interest in principal or income from the trust. It is also more difficult to amend or revoke an irrevocable trust in general, and the settlor / beneficiary is prohibited from amending or revoking the trust.
A trust that is created at death is called a testamentary trust. A testamentary trust is a trust that is contained in a will. The trust becomes effective upon the death of the settlor (in this case, the person who wrote the will containing the testamentary trust). Because the trust is contained in a will, probate is required. Thus, unlike many trusts, such as the revocable living trust, the testamentary trust does not avoid probate.
If you have additional questions about Trusts or are ready to have one prepared, call or come visit with the estate planning attorneys at the Paul Law Firm. Consultations are always free!