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Trusts & Estates

A trust is a legal framework that enables one party, a trustor, to give another party, the trustee, the right to hold title to property or assets for the benefit of a third party, the beneficiary. Trust’s can be established for a variety of reasons, some of the more common ones being to protect the grantor’s assets and to manage the transfer of assets to a beneficiary.

Categories of Trusts

Although there are many different types of trusts, each fits into one or more of the following categories:

  • Living or testamentary
  • Revocable or irrevocable
  • Funded or unfunded

Living or Testamentary

A living trust, also called an inter-vivos trust, is a written document in which an individual’s assets are provided as a trust for the individual’s use and benefit during their lifetime. A trustee is named when the trust is established; this person handles the affairs of the trust and transfers the assets to the beneficiaries at the time of the grantor’s death.

A testamentary trust, also called a will trust, specifies how an individual’s assets are designated after the grantor’s death.

Revocable or Irrevocable

The trustor can change or terminate a revocable trust during that person’s lifetime.2 An irrevocable trust, as the name implies, cannot be changed once it’s established.3

Living trusts can be revocable or irrevocable. Testamentary trusts are generally irrevocable once established but can be revocable via a will if the grantor is still alive. The fact that they are unalterable, containing assets permanently moved out of the trustor’s possession, allows estate taxes to be minimized or avoided altogether.

Funded or Unfunded

A funded trust has assets put into it by the trustor during their lifetime. An unfunded trust consists only of a trust agreement with no funding. Unfunded trusts can become funded upon the trustor’s death or remain unfunded. Since an unfunded trust exposes assets to many perils a trust is designed to avoid, ensuring proper funding is essential.

Common Purposes for Trusts

The trust fund is an ancient instrument (dating back to feudal times, in fact) that is sometimes greeted with scorn due to its association with the idle rich (as in the pejorative “trust fund baby”). But trusts are highly versatile vehicles that can protect assets and direct them into the right hands long after the original asset owner’s death.

A trust is generally employed to hold assets safe from creditors or others who might have a claim on them after the grantor’s death. In addition, trusts are often used to keep assets safe from family members who might otherwise sell or spend them. Assets may be placed in trust for trustworthy family members—even a relative with the best intentions could face a lawsuit, divorce, or other misfortune, putting those assets at risk.

Trusts can also be used to secure assets for specific purposes, such as a beneficiary’s education or to help them start a business.