What is a trust?
A “trust” is nothing more than a legal relationship in which one person holds property for the benefit of another. The person who holds the property is called the “trustee.” The person who benefits from the property is called the “beneficiary.” The trustee owes the beneficiary several important responsibilities. The trustee must be loyal, honest and fair with the beneficiary. The trustee must also act in the beneficiary’s best interest.
What are the different types of trusts?
Trusts that take effect at death
Trusts that take effect at death are called “Testamentary Trusts.” A testamentary trust is a trust that is created in a Last Will and Testament.
- Testamentary trusts do not take effect until the creator of the trust dies.
- Many married couples draft a Will that establishes a trust for their children if both spouses pass-away simultaneously. The trust only takes effect if both spouses die, and no one is left to support their children.
- These trusts serve several purposes. In most cases, testamentary trusts are used to provide professional money management for children.
Trusts created during life
Trusts created during life are called “Living Trusts.” Living Trusts usually take effect immediately. In general, Living Trusts are named after the creator of the trust, such as the “John A. Smith Revocable Trust,” or the “John A. Smith Irrevocable Trust.”
There are two types of living trusts:
- Revocable trusts are trusts that can be changed or terminated.
- Revocable trusts can be used to avoid probate. “Probate” is a court proceeding in which a judge determines the validity of a Will, and a personal representative collects the decedent’s assets, pays the bills, and distributes property to heirs.
- Assets that are transferred to a revocable trust are usually not subject to probate at death; however those assets are still subject to income tax, federal estate tax, and inheritance tax.
- Irrevocable trusts cannot be changed after they are created.
- Irrevocable trusts are commonly used to provide income or support for heirs.
- Assets that are transferred to an irrevocable trust may be subject to federal gift tax. The property is usually not subject to federal estate tax or state inheritance tax.
Why do people form trusts?
- Many people form trusts to provide professional money management for multiple generations, or for the following type of heirs:
- Physically or mentally disabled heirs
- Heirs who make poor financial decisions
- Heirs who make impaired lifestyle choices
- A trust can be used to provide estate tax savings.
- Some people use a trust to free themselves or their heirs from the burdens of management. Rather than manage assets or force their heirs to manage assets, they allow a trustee to invest their money and oversee their property.
- A trust can be used to avoid probate court. In most cases, assets held in trust are not subject to probate. Probate is a court proceeding in which a court determines the validity of a Will, and a personal representative is appointed who will inventory assets, pay debts and distribute assets to the heirs. Asset that are held in trust are generally not subject to probate. Instead, the assets pass to heirs in a private, confidential setting.
- A trust can provide uninterrupted management of assets after death. Rather than having assets tied up in a court proceeding, the assets will be put to their useful purpose.
- Some people use a trust to help resolve potential conflict among their heirs. After death, children and grandchildren will sometimes argue about the division of assets. Oftentimes, old grudges are resurrected, and families suffer permanent divisions. When you name the Heartland Trust Company as trustee, we will act as a neutral, objective third-party who will resolve these disputes, and keep the family together.
- Many people form trusts to maintain a legacy, like preserving a family farm or business for the next generation.
- Some form trusts for charitable purposes. These trusts provide scholarships for students, support churches, or give funds to worthy causes.