I had several clients ask about setting up trusts last week and was surprised at how little they knew about what a trust is and what a trust does. I have done work for them in the past and just assumed they knew more about Estate Planning than they did. It served as a reminder that sometimes as an attorney I get "institutionalized" when it comes to what I do for a living. By "institutionalized" I mean I often get so caught up in practicing Estate Planning Law that I begin to assume everyone knows what I know about it. I thought back to how much I knew about Estate Planning before I went to law school and even several years after law school. Not much. So for the likely many of my readers who don't know what a trust is, here goes.
A Trust Is...
A trust is bascially a set of instructions that specifies how you would like your assets to be managed and distributed to your beneficiaries. A trust is created by a legal document that names an individual or institution to manage the assets placed in the trust. In general there are two types of trusts:
(1) Trusts that are implemented while you are alive (i.e., revocable living trusts or inter vivos irrevocable trusts). When you establish a living trust, you reregister your assets to the trust, and the trust becomes the owner of your assets. You can name yourself as trustee. When you die, the trust assets avoid probate; and
(2) Trusts that are created through your Will after you pass away (i.e., testamentary trusts).
Why Create A Living Trust?
There are two basic reasons to create a living trust. First, to maximize your ability to control the management and distribution of your assets. There are many advantages to retaining control over your assets through a living trust. Some of these advantages include naming someone to manage your assets in case you become incapacitated, controlling when your assets will be distributed to your heirs, and maintaining privacy of your finances even after you have passed away.
The second reason to create a living trust is to prepare for possible tax consequences. The IRS treats transfers of assets for individuals at death as either nonmarital or marital. A nonmarital transfer is taxable, a marital transfer is not.