How Trusts Are Used in Estate Planning

Trust is a complicated notion, with many different meanings and applications. A common way that trust is used is in the context of a legal entity, such as a corporation or nonprofit organization. In this context, trust is the relationship between a person who owns or controls the legal title to property and an individual who has the right to use and benefit from that property. This relationship is controlled by law and can be impacted by tax laws, including the Internal Revenue Code.

The terms of a trust can be made public or private, but they generally include a trustee, beneficiary and assets. The trust document spells out how the trustee manages the assets and distributes them to the beneficiaries. Trusts can be revocable or irrevocable, and the trustee is appointed by the grantor who creates the trust. Trusts may also be recursive, where the trustee is not replaced when they are deceased but passes on their duties to a new trustee.

There are several reasons why individuals choose to put their assets in a trust. For starters, it can help to avoid probate, which is a time-consuming and costly legal process that requires a court’s approval to verify the validity of a will. In addition, some states require that heirs pay estate taxes on their inheritance.

Another reason to use a trust is to ensure that beneficiaries receive the inheritance they were promised, even if a person becomes incapacitated or dies intestate. This is possible by using a power of appointment, which allows the trustee to distribute trust funds to individuals or organizations. For example, a person who owns an art collection can create a trust that will allow the trustee to give the pieces to specific family members or to a museum.

A trust can be established to protect a business or real estate holding, as well. This can be helpful if the beneficiary is not a family member or can’t handle large sums of money. In this case, a professional trustee can manage the business or property in the name of the trust and make decisions on behalf of the beneficiary.

Individuals who want to use a trust as part of their estate planning should consult with an attorney. This professional can help them understand the benefits of a trust and select the appropriate type for their needs. In addition, an attorney can assist with creating the trust documents, which must be signed by the grantor. Alternatively, some individuals choose to set up their own trusts through online services. However, these options are typically not as comprehensive as working with an estate planning attorney. Additionally, they often require a great deal of paperwork and record-keeping. This can be particularly difficult when dealing with illiquid assets like businesses and real estate. These types of assets can take longer to sell than liquid ones such as cash, stocks or mutual funds. They can also be more likely to cause disagreements among family members if they are not handled correctly.