A trust is a document where you can give another person or institution the power to hold and manage your money for your benefit or the benefit of another person. A trust can serve many purposes, including estate planning, tax planning, medical planning, and charitable giving.
A trust is generally created in the same way as a will is created, that is, by a written document. Unlike a will, which is used mainly to give property away after your death, a trust can manage and invest your money and property both during your lifetime and after your death. Also, property that you place into a trust does not have to go through probate, which, in some circumstances can be time-consuming, expensive and public.
The person who creates the trust is called the “grantor” or the “settlor.” The person managing the money and property is called the “trustee,” and the trustee can be you or someone else. The person who receives the money or property from the trust is called the “beneficiary.” The money and property in the trust are called the “trust assets.” The trustee must follow the instructions in the trust describing how to manage and give out the trust assets, and how long the trust lasts.
You can put anything you own into a trust, like money, bank accounts, stocks, bonds, real estate, houses, vehicles, furniture, artwork, jewelry, and writings. If you are going to own something in the future, you can put your interest in that property into the trust. Your retirement accounts can name your trust as the beneficiary. There are certain types of trusts which can buy or take over a life insurance policy.
The typical way a trust works is that a sum of money, called the “principal” is put in a bank account or an investment account in the name of the trust. The trustee controls the account. The interest that is earned on the account is called “income.” The trust document will either state how much and when trust principal and income are given to the beneficiary, or it will say that the trustee can spend what he thinks is proper. It also states who will receive any money that is left when the trust ends.
There are different types of trusts. First, there are living trusts and testamentary trusts. A living trust begins to operate while you are alive. It may last only until your death, with the assets to be distributed at that time to the people or institutions that you name in the trust. Or it can continue after your death. For example, the trustee continues to hold and use the assets for your children or grandchildren until they reach a certain age. A testamentary trust is one that you create as part of your will, so it starts operating only after your death. It, too, tells the trustee how to use the trust assets for the benefit of the people or institutions that you name, and when it will end. The trust can state who should get any property that remains when the trust ends.
There are also trusts used for specific situations, such as supplemental needs trusts and spendthrift trusts. A supplemental needs trust (or special needs trust) lets you set aside money for a mentally and/or physically disabled person without having that person lose the right to collect Medicaid or other public assistance. A spendthrift trust can be used to limit the funds available to loved ones who cannot manage money well or who have many creditors.
Legal Editor: Jill A. Kupferberg, March 2015
Changes may occur in this area of law. The information provided is brought to you as a public service with the help and assistance of volunteer legal editors, and is intended to help you better understand the law in general. It is not intended to be legal advice regarding your particular problem or to substitute for the advice of a lawyer.