A trust separates title to, and control of, an asset from the use or benefit of the asset. A simple example would be a bank account established in the name of a trustee for the benefit of a beneficiary. Only the trustee can make withdrawals from the account or otherwise control the account, but the money must be held or used for the benefit of the trust beneficiary.
Trusts can be classified as “revocable” and “irrevocable.” Either type of trust can be established during the life of the settlor. An irrevocable trust also can be established to take effect at the death of the settlor. Both revocable and irrevocable trusts are created in a written document signed during the settlor’s life. A trust established at the death of the settlor is a type of irrevocable trust called a “testamentary” trust and is created within a will.
Trusts are created for various reasons. A “revocable” trust is usually established as an asset management tool during the life of the settlor in the event of the settlor’s incapacity and as a probate avoidance device at the settlor’s death. A revocable trust is not created for tax purposes and it does not protect trust assets from claims of creditors of the settlor during life or at the settlor’s death. A revocable trust may be modified or revoked during the settlor’s life, but it becomes irrevocable at the settlor’s death. During the settlor’s life, the settlor is usually the trustee and a beneficiary. When the settlor is also the trustee, the trust uses the settlor’s social security number as the federal tax identification number of the trust.
An “irrevocable” trust is established during the life of the settlor often for tax purposes especially to remove ownership of certain assets from the settlor’s federal gross estate which may be subject to estate taxation at the settlor’s death.
There are also special purposes trusts such as a “special needs trust” created during life or at death for a disabled beneficiary who is receiving Supplemental Security Income (SSI) and Medicaid to allow the beneficiary to continue to remain eligible for government assistance.
Please see Frequently Asked Questions in this website for additional information.
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The cornerstone of every estate plan is the “will,” which is also referred to as the “last will and testament.”
A “simple will” gives outright distribution of a person’s assets at death to named beneficiaries and nominates a personal representative (i.e., executor). It does not contain a trust or complicated provisions.
A “trust” is an agreement between a person who is setting up the trust (usually called the “settlor,” “grantor,” or “trustor”) and the trustee who is to have control of assets placed into the trust for the benefit of the settlor or a third party.
Wills & Trusts
Copyright 2015. Terrence T. Dariotis. All rights reserved.