When someone says that they have a “trust,” what are they really saying?
Trust fund baby –we’ve all heard it in the movies. And now all we can hear when we hear the word “trust” is “rich” or “money.” However, trusts aren’t just about excessive amounts of money, tyrannical family legacies, or the Vanderbilts. What does it mean to have a trust?
(Yes, I am an attorney, but, no, I am not your attorney. Nothing in this post constitutes legal advice or creates an attorney-client relationship. This post and this site are merely educational, informational, and entertaining.)
Instead, a trust is an incredibly useful tool for transferring assets during life and after death. Trusts are for a myriad of social and economic backgrounds and have as many different types as flavors of ice cream.
What is a trust?
When I think about a trust, I think about a bucket. What the bucket holds are the trust assets. The rules for the assets getting in or out of the bucket are governed by the trust declaration or trust.
The trust is simply the rules that we apply to certain assets. Anything that the trust owns is subject to those rules.
Much like a business, a trust is its own unique entity. The bucket is not a part of any individual –it can stand alone. In fact, it even may pay its own taxes and tax rate.
More technically, a trust is an instrument created by a grantor/settlor/trustor to be managed by a trustee. A trust can receive, distribute, sell, or manage the assets it owns and must distribute those assets at the time or times stated in the trust.
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A trust can also add conditions to those distributions or establish rules for who receives assets, how they are taxed, and how they are used.
Why Might I Want a Trust?
Trusts can be used for a variety of purposes. They are not limited solely to the obscenely wealthy.
Some great reasons for having a trust include:
Avoiding probate
Blended families
Estate planning at incapacity
Extensive or complicated assets
Minor beneficiaries
And more
RELATED POST: Why You Might Want to Consider a Trust
What are the types of trusts?
Revocable Living Trusts
The most common type of trust is a revocable living trust. Revocable living trusts are generally convenient tools for holding assets during life and transferring them at death.
Related post: Wills vs. Living Trust: What’s the Difference?
Grantors of revocable living trusts (grantor trusts) have all the same powers over their assets in the trust as they would have if they left them in their personal name.
Grantors over revocable living trusts can still buy, sell, mortgage, encumber, improve, or burn down their assets in the same ways as if they didn’t have a trust.
What’s more, transfers to a revocable living trust that is also a grantor trust are recognized as nontaxable events for tax purposes.1 This means that having a revocable living trust will do nothing to change your taxation or tax status. Your income and property taxes will stay the same (with limited exception.)
Most revocable living trusts, however, have some termination point at which time they become irrevocable. That time is usually upon the death of one or all grantors. At that time, most revocable living trusts are terminated and distributed to the beneficiaries.
Irrevocable Trusts
Irrevocable trusts, on the other hand, are generally far more complex. They are completely separate entities from the grantor(s) and can only do the actions allowed by the trust terms.
Irrevocable trusts are a limitation on the grantor’s autonomy over his or her assets. He or she must surrender some controls to the trust.
Irrevocable trusts might transfer small bits of assets at a time, might limit tax treatment, or might even limit the types of assets owned (i.e. life insurance, annuities, s-corps, or IRAs).
Irrevocable trusts are used less for simply transferring assets at death and more often to accomplish specific purposes.
Some of those purposes might include:
- Providing for minor children while they grow up (Minor’s Trust);
- Transferring small chunks of wealth at a time through gifting (Crummey Trusts);
- Sheltering assets from Medicaid;
- Providing for a child who has special needs or receives state or federal benefits (SNT);
- Making deductible gifts to charities or foundations (Charitable Lead/Remainder Trusts);
- Sheltering large quantities of assets for multiple generations (Dynasty or Legacy Trusts);
- Holding and transferring annuities or houses (GRATs or QRTs),
- And so many more.
How Much Money Do Trusts Have in Them?
How much money do these types of trusts have in them? Well, many have no money at all and are only funded upon a person’s death.
Still others possess nothing but property or depreciated assets.
If someone is using a trust to transfer family business interests, then those business shares may have little to no value.
In other words, trusts are not merely tools for the obscenely wealthy or savvy. Instead, whether you have a trust is not a function of money but of your needs and wishes.
Everyone has different priorities and values –avoid taxation, maintain autonomy, create seamless business transitions. Different trusts achieve those different priorities and values.
Perhaps you need a trust not because you are outrageously wealthy but because you have a blended family or own out-of-state property. The amounts might have shockingly little to do with it.
Having a Trust Could Mean a Lot of Things, but How Do You Know Whether a Trust is Right for You?
What does it mean to have a trust? Well, it could mean a lot of things. When someone tells you that they have a trust, they might have a grantor trust that is simply a mechanism to transfer assets at death.
Or, having a trust could mean that they are a child, grandchild, or charitable recipient of a very wealthy grantor.
When you hear that someone has a trust or your attorney suggests that you have a trust, it likely means that you have a goal, hope, or asset plan that is best served by a trust. It might not mean that you have millions of dollars in the bank.
The only way to know whether you need a trust is not by asking an online search engine but by meeting with a reputable estate planning attorney in your area.
Be clear about your wishes, your assets, and your priorities. A good estate planning attorney can take those wishes and dreams and find the trust or non-trust tool that fits you the best.
He or she can also determine which trusts are available under your state’s laws.
Trusts serve far more purposes than just holding lots and lots of money for the crazy rich. They are for a variety of people and a variety of reasons.
To know whether you need a revocable, irrevocable, minor’s, Crummey, etc. trust meet with an estate planning attorney in your area.