A trust is a legal structure that holds assets and distributes them to beneficiaries according to specific terms. The assets can include money and property such as real estate, investments, artwork, rare book collections, cars or even family heirlooms. The grantor—the person creating the trust—workes with an attorney to create a trust document, which outlines their wishes for the distribution of particular assets. The grantor also identifies a trustee or trustees, who manage the trust. This can be a person or a firm. The trustees must invest and manage the assets, file taxes and communicate with beneficiaries. It’s important to have backup trustees in case the primary trustee is unable to perform their duties. A professional trustee can provide the most expertise and objectivity, though they will generally charge more than a friend or relative.

The trust can be revocable during the grantor’s lifetime, allowing them to change or amend it as they wish. It can also be irrevocable, meaning the trust will continue to exist after the death of the grantor. Trusts can have many different purposes, including avoiding probate, minimizing taxes and providing for special needs. For example, a special needs trust can be set up to support an individual with physical or mental disabilities without disqualifying them from receiving government benefits such as Medicaid and SSI.

Trusts can also offer tax advantages, depending on how the trust is drafted and structured. For example, a revocable trust may pay income, capital gains or estate taxes, while an irrevocable trust may not. Whether or not the trust is taxable depends on the amount of assets in it, who owns the assets and how they are distributed.

The grantor of the trust may choose to hold certain assets in a separate account, rather than transferring them directly to a beneficiary. This can help protect the trust’s assets from creditors, lawsuits or divorce. It can also limit the number of people who have access to the assets and help keep them private.

A trustee must be careful to avoid mismanagement or improper decisions. While this can be difficult to prevent, a well-drafted trust will outline specific instructions and guidelines for the trustee. It can also provide safeguards to protect the beneficiaries from financial exploitation or fraud.

While trusts are often geared toward high-net worth individuals and families, anyone can benefit from them. The key is to understand your options, and work with an experienced attorney. For more expert advice on investing, taxes, retirement and personal finance, subscribe to Profit and Prosper. You’ll get Kiplinger’s best tips for wealth-building delivered to your inbox daily. It’s free and easy to sign up.