What Is a Trust?


A trust is a legal entity that can be used to manage and hold assets for the benefit of one or more beneficiaries. A trustee is appointed to oversee the trust’s investments and property and must exercise prudent discretion in managing it. There are a variety of uses and benefits of a trust including avoiding probate, protecting against financial predators (including creditor claims and marital rights in the case of a divorce), reducing estate taxes, and carrying out charitable intent in a tax-efficient manner.

A trust can be set up in an will or as part of a comprehensive estate plan. It is often used to keep assets out of a surviving spouse’s estate for tax reasons, but there are other reasons as well. These include:

There are many different types of trusts. It’s important to understand the difference between them and what they can and cannot do. Trusts can be complex and should always be created by a qualified attorney.

When you transfer your assets into a trust, you give up legal ownership of them. The trustee holds title to the property and must buy, sell and invest it responsibly on behalf of the beneficiaries. The trustee can also distribute assets to beneficiaries in a variety of ways. Staggered distributions, like monthly payments, may be made to beneficiaries over a specified period of time, or they could be distributed after certain triggering events, such as when the beneficiary turns 18.

It’s a good idea to discuss your wishes and goals with an experienced attorney before drafting your trust. Some attorneys will offer a basic trust package for a low fee and others will charge an hourly rate. The fees can vary greatly depending on the number and type of assets included in the trust, how complicated your distribution strategy is and whether or not you choose to have an attorney prepare a will along with the trust.

Costs: The primary cost of a trust is the attorney’s fee to draft it, but there are other costs involved as well, such as any property registration or title transfers and filing fees. Additionally, there are compensation expenses that may be payable to the trustee. These costs can be significant and should play a role in the decision to create a trust.

The trustee is responsible for investing and managing the trust’s assets and providing periodic income distributions to beneficiaries. These distributions are typically made up of interest, dividends, rents and royalties, which are taxable to the beneficiaries. The trustee must report these earnings to the IRS and file appropriate forms with the Internal Revenue Service.

A trustee should be someone that you trust, but that is not necessarily your child or sibling. A family member is generally not a good choice because of the high fiduciary standard that comes with being a trustee. The trustee must act in the best interests of the beneficiaries, and if he or she is not performing adequately, a replacement can be selected by unanimous consent of the beneficiaries of the trust.