A trust is an instrument that controls property held by a trustee for the benefit of someone else. The maker of the trust is the settlor, and the person or entity taking control of a settlor’s property is a trustee. There are many different kinds of trusts, and they can be used in many different ways.
A testamentary trust is one created by a will. It is funded and comes into existence only upon the death of the person who signed the will. They are often used to provide for minor children or disabled beneficiaries. In contract, a trust created before death is called a living trust. They can be irrevocable, but in most instances they can be revoked at any time. A living trust is funded by the transfer of some or all of the settlor’s assets from the settlor personally to the person acting as trustee.
Living trusts can be used as a means to avoid a probate proceeding. Probate is avoided because the assets are owned in the name of the trustee, not in the name of the settlor. By naming a successor trustee and by including specific instructions about what is to happen to the assets held in trust, a settlor can avoid probate entirely.
Living trusts are useful for tax planning. By using living trusts, a married couple can assure that each person can take full advantage of available federal and state exemptions. Living trusts can also be useful for other purposes. For example, a living trust can be an effective way of planning for disability or incapacity.
In planning where the use of a trust is included, it is always important to also have a will that can be used if a settlor has forgotten to transfer all of his or her assets to the trustee.