Trusts are important tools for protecting property from taxation and third-party interference
By Barbara Craig, Attorney at Law
A trust is a legal document that, when properly prepared, assumes control over property and manages it for the betterment of the named beneficiaries of the trust. A trust can have control for as long it is needed and until there is no property left in the trust to manage. Most people that are interested in preparing a trust do so as part of their estate planning needs.
Why trusts are created
Trusts are created for generally three purposes: to protect property in your estate; to reduce or eliminate estate taxes; and to avoid the probate process. No matter the reason for creating a trust, there are certain elements of a trust that must be present for it to be considered valid by a court of law.
When a trust is created, a new legal entity is formed, which now has title and ownership of all of the property transferred to the trust. The document that contains all of the terms of the trust is called the The trust declaration, and is signed by the person(s) who created the trust. This person(s) is called the settlor or grantor.
How a trust is created
The settlor transfers ownership of his personally owned property to the trust. When property is transferred to the trust, the trust has been “funded”. Real property is transferred to the trust by a recorded deed and personal property is transferred into the trust by a deed or other written assignment, or by changing the ownership documents, such as an automobile title, to reflect the name of the trust.
When the settlor creates the trust, he appoints a person to manage it. This person is called the Trustee, and he will manage the trust property in the interest of the beneficiaries named in the trust declaration. The initial trustee is most commonly the settlor, depending on the type of trust created. The trust remains in effect until some future point in time, and so long as there is trust property to be managed.
Revocable or irrevocable trusts
All trusts fall into one of two categories:
Revocable trusts are set up for the benefit of the settlor during his lifetime. It is a flexible trust in that it can be modified to suit the needs and purposes of the settlor at any time. The initial trustee is usually the settlor. A revocable trust generally lasts for the lifetime of the settlor and upon his death the trust becomes irrevocable and can no longer be modified.
Irrevocable trusts are set up to transfer property out of the name and control of the settlor and into the trust. The trustee can never be the settlor. This trust is not modifiable and cannot be revoked once the assets have been transferred to it. The settlor loses all control over these assets. Irrevocable trusts are used to help avoid estate taxes. Because the assets contained in the trust are no longer owned or controlled by the settlor at the time of his death, estate taxes are not payable on the assets in the trust.
There are many different types of trusts, each of which has specific features and benefits. Click here for an article which discusses different types of trusts for estate planning.