What is a Trust?

A trust is a legal entity that can own property or assets, often on an individual’s behalf. The trust is managed by a “trustee,” for the benefit of the “beneficiaries.” This allows people to transfer assets out of their own name, and into the trust, thereby creating a legal separation. In practice, many people act as both trustee and beneficiary for their own trust, and treat the trust’s assets as they would their own – with the benefit of the legal separation.

Why Trusts?

Trusts have many benefits, including:

• Ease in illness. A trust can allow your family to easily – and legally – manage your assets, should you become unable. US Bank explains that “a revocable trust established during your lifetime can also help your family if you become ill or unable to manage your assets. If that happens, your trustee can make distributions on your behalf, pay bills and even file tax returns for you. You can choose ahead of time who to appoint (through the trust) to manage the assets.” 
• Control. As Charles Schwab advises, “you can specify the terms of a trust precisely, controlling when and to whom distributions may be made.” Trusts can outline specific conditions for inheritance. For example, a trust can specify certain conditions that must be met before beneficiaries can access assets, such as reaching a certain age.
• Oversight. A trust will always have a trustee. While the trustee can be the beneficiary, it can also be a third party. If an individual has concerns about the way their beneficiaries will use assets, a third party trustee can oversee the trust. Schwab continues, “a properly constructed trust can help protect your estate from your heirs' creditors or from beneficiaries who may not be adept at money management.”
• Avoiding probate. When an individual dies, their estate must go through probate, a legal process in which a will is validated before the estate can be distributed to heirs. When assets are held in a trust, probate is not required. Since the trust retains legal ownership of the assets, the trust – and therefore control of its assets – can be passed directly to beneficiaries, without going through probate.
• Privacy. Probate is a matter of public record, whereas the details of a trust are private. If an individual wants to keep their estate private, a trust can provide this protection.

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What's the Difference between Revocable vs. Irrevocable Trusts?

There are two types of trusts: revocable trusts (also called “living trusts”) and irrevocable trusts. Both have their own pros and cons.

Revocable trusts allow for greater flexibility, and can be modified or dissolved at any time, should the creator’s circumstances or priorities change. However, US Bank shares that “because you can make changes to your revocable trust at any time, for certain purposes you are still viewed as the owner of the assets – even though you have a trustee who manages the trust for you. For example, you’ll be responsible for making tax payments and reporting on the trust’s investment returns, and revocable trust assets are includable in your estate and are available to creditors.” The main benefits to a revocable trust are: avoiding probate and allowing for the trustee to legally manage assets, making it a useful estate planning tool for many family caregivers.

An irrevocable trust, on the other hand, is one that cannot be modified or dissolved after it’s created. When assets are transferred to an irrevocable trust, they truly move out of an individual’s estate and into the legally distinct trust. The trust is truly its own entity, and as such it pays its own income tax and files a separate tax return. This legal separation can come with estate tax benefits, and keep assets protected from creditors or a legal judgment against beneficiaries. 

Given the permanence of irrevocable trusts, they should not be created lightly. They are most commonly used as an estate planning tool for high net worth individuals, and as Fidelity clarifies they are “generally preferred over a revocable trust if your primary aim is to reduce the amount subject to estate taxes by effectively removing the trust assets from your estate.” 

Does your Care Recipient Need a Trust?

If your care recipient needs help managing their finances, a trust could be a great solution, as the trustee will be able to manage finances on your care recipient’s behalf. This can give your care recipient and family a great deal of comfort, knowing that their assets are being managed and protected. As AARP explains, “while of sound mind, your loved one transfers assets to a revocable living trust and names a trustee. If, in the future, your loved one loses the capacity to make sound financial decisions, the trustee becomes responsible for keeping the trust's property safe.”

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Next Steps

Given the complex nature of trusts, it is best to work with an estate planning attorney. They can help your care recipient understand options, and advise on the best solution for your care recipient’s situation and priorities. If a trust is the right fit for your family’s needs, they will also be able to help you create the trust.

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