What Are Trusts?

One of the most common tools in estate planning is a trust. A trust is a tool that allows an individual to decide in advance what should happen to his assets after he is gone. Trusts can also be used to minimize taxes and protect assets from creditors.

In a typical trust arrangement, three parties are involved in the process. The individual who sets up the trust is known as the grantor. The person who manages the trust assets on behalf of the grantor is the trustee. The person who stands in line to inherit the assets inside the trust is the beneficiary. The grantor decides what assets should be put into the trust and then transfers these assets into it. At a future date, the assets can then be transferred to the beneficiary.

When setting up a trust, you can choose between two formats: revocable and irrevocable. With a revocable trust, you can change the terms of the agreement any time while you are still alive. An irrevocable trust cannot be altered while you are still alive. The beneficiary of the irrevocable trust could alter the agreement, but the grantor cannot change the trust agreement.

One of the major benefits of setting up a trust agreement is that you can help your family members avoid probate. When you die without a trust, your assets may have to go through probate court before they can be distributed to your beneficiaries. In most states, if your assets total more than $20,000, your estate must go through probate. Some exceptions to this are properties that are owned jointly or life insurance policies that have a beneficiary named. When your assets go through probate, everything is documented and becomes a matter of public record. By setting up a trust, others will not know what assets have been transferred to your beneficiaries.

With some types of trusts, you can help minimize the amount of estate taxes your beneficiaries have to pay when you die. For example, if you set up an irrevocable trust, the amount of the assets you transfer into the trust is removed from your estate. This reduces the size of your estate and can get it under the estate tax exemption. If you have assets in an irrevocable trust, you can also keep these assets away from creditors.