Trusts are a special way of turning assets into a gift. They can help manage your assets and avoid probate. Through a trust, you can even give a gift to yourself. A trust is managed by one or more trustees who manage the trust property for one or more beneficiaries.
Every trust is created by a properly executed document (usually simply called “the trust” or “trust document,” or sometimes, the “trust agreement.”) The other requirements are a Settlor, a Trustee, and a Beneficiary. The Settlor (also known as the “Grantor”) is the gift-giver, e.g., the person(s) putting assets into the trust. The Beneficiary is the person for whose benefit the trust exists. The Grantor and the Trustee can be the same person if you are making the gift to yourself. The Trustee manages the trust to preserve the assets and make sure they are used to benefit the Beneficiary according to the Settlor’s wishes, as specified in the trust.
The Revocable or “Living” Trust
The creator of a revocable trust typically also serves as a trustee and as the principal beneficiary during their lifetime. This is often called a “Living Trust.” It provides for successor trustees in the event of incapacity and successor beneficiaries upon their death.
The appointment of a successor trustee can be an excellent way to provide for property management. Revocable trusts can be more narrowly tailored than durable powers of attorney, so the Settlor can be specific about the use of the trust property. Finally, as emphasized in Chapter 12, revocable trusts avoid probate.
Family Protection Trusts
Another type of trust is a Family Protection Trust. Parents can protect the inheritance they leave their children and grandchildren by leaving them in trust rather than outright to their children. These so-called “spendthrift” trusts are designed to protect children from themselves, e.g., from poor spending decisions. The downside is that the child cannot control distributions, so establishing clear terms and choosing a good trustee is essential.