A trust is an arrangement – formally documented in a legal document – that holds money or property for the benefit of one or more beneficiaries. The person who creates the trust is called a grantor, and the trustees manage the assets of the trust in accordance with its terms. The beneficiary can be a single person or institution (such as a charity or a family member’s school). The beneficiary may receive annual earnings distributions or may ultimately receive the trust principal (“corpus”) at the end of the trust term.

Trusts are usually used by individuals of high net worth, but even those with a lower level of wealth may find them useful. For example, many people set up trusts to help ensure that a dependent with a mental or physical disability gets appropriate care. A trust can also avoid the costs and complications associated with conservatorships in probate court by allowing a trusted trustee to retain control of assets until it’s time for them to be distributed.

It’s important to note that while a trust can be an effective estate planning tool, it doesn’t protect the grantor’s assets from creditors. This is especially true of revocable trusts. To protect your assets, you should consult with a professional who specializes in estate planning and trusts.

A key reason for creating a trust is to reduce the amount of taxes paid by the grantor and beneficiaries. Transferring assets to a trust can reduce the grantor’s taxable estate by effectively removing them from the taxable estate (assuming the trust is properly structured and administered). Trusts may also be used to limit a beneficiary’s access to assets to control spending or investment decisions.

When creating a trust, it’s essential to consider the tax implications and the type of assets you plan on transferring. For example, trusts that hold real estate typically require special legal procedures. Additionally, the types of investments held in a trust are often subject to different kinds of tax rules than those owned by an individual.

A trust can be established during the life of the grantor, and it can be revocable or irrevocable. Revocable trusts allow the grantor to change the beneficiaries, add or remove assets and even pay themselves income from the trust during their lifetime. Many people who are concerned about a degenerative illness opt for an irrevocable trust, which isn’t subject to any changes once the grantor passes away.

Trusts can be more expensive to establish and maintain than a will, particularly because they must be updated as the assets in the trust are sold or transferred. Furthermore, a trust requires meticulous record-keeping. Talk to your attorney for more details about the costs of establishing and managing a trust.