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Estate Planning 101 : Understanding Trusts

 
By Candice Taylor in Personal Finance
November 19th, 2011

The most common method for passing assets or property to loved ones after death is by last will and testament but trusts can provide greater control over your last wishes.

estate planning trustsMost people don’t like to talk about it but estate planning is a necessary task for anyone with assets wishing to ensure they are distributed fairly to beneficiaries such as a spouse, significant other, children or grandchildren.

While the most common form of estate planning involves creation of a last will and testament, creating a trust can offer a greater deal of control over how and when assets are distributed to beneficiaries.

What is a Trust?

A trust is a legally binding relationship by which property is held by one party for the benefit of another. A trust is created by a settlor who places his/her property in the care of a trustee who then legally controls that property for the beneficiaries. While any sort of property may be held in trust, growth assets such as real estate or investments are more commonly placed into trust. A trust can be created during the settlor’s life through a trust instrument or after the settlor’s death through a will.

A trust is solely governed by the terms and conditions under which it was created. The terms of the trust are recorded in a trust instrument or deed with the trustee retaining legal title to the trust property. The beneficiaries have equitable title to the trust property which provides a separation of control and ownership of the property.

While there are many different type of trust for varying purposes, the two most commonly used in estate planning are revocable trusts and irrevocable trusts.

What is a Revocable Trust?

A revocable trust is a trust which may be legally altered, amended or revoked by the settlor at any time. Provided the settlor is not mentally incapacitated, the trust instrument may be freely changed to suit the settlors interest. These days, revocable trusts are becoming very common as a replacement for a traditional will to minimize administrative costs associated with probate and to provide a centralized system for administration of the settlor’s final affairs after death.

What is a Irrevocable Trust?

An irrevocable trust is a trust, which cannot be altered, amended, or revoked by the settlor or any other party until the terms or purposes of the trust have been legally completed. Irrevocable trusts are commonly used by a settlor who has a large estate where it can be mutually beneficial to avoid estate taxes and other legal and financial liabilities. It is not a recommended option, unless absolutely certain because the settlor will not have a chance to change their decision once it is made.

There are many legitimate reasons for creating a trust but the most common reasons are for privacy and to prevent beneficiaries from spending their inheritance foolishly. Another reason for creating a trust is asset protection where a person can distance themselves from assets with the intention that future creditors will not be able to access assets, even though they may be able to force bankruptcy.

A traditional will also has the potential to create family disputes after your death by any family member who chooses to challenge your last wishes. By using a trust, you can protect your last wishes and specifically disinherit anyone who posts a challenge to your intended beneficiaries.





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One Response to 'Estate Planning 101 : Understanding Trusts'

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  1. Schulteis
    posted on December 10th, 2011

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