What Is A Trust

The legal arrangement known as a trust is one of the most important tools for both business and personal planning.  Although many forms of trusts, such as Living Trusts and Life Insurance Trusts have been popular for many years and are common in most estate plans, too many people don’t understand how their trusts work or the benefits which can be accomplished.

How Does A Trust Work?

In order to take advantage of the benefits which can be provided by a trust, it is useful to understand exactly what that legal term means. What is a trust and how does it work?

A trust is a legal entity, separate from the individual who creates the trust. This is similar to a partnership or corporation which is regarded as distinct from its owner. A trust is governed by certain rules which are set out in an agreement—usually between two parties. One person, (the trustor) puts money or other property in the trust.  A trustee is the person who agrees to hold the property according to the terms of the agreement. The trust agreement specifies what the trustee is required to do with the property – how he is to hold it, for how long and who is to receive any benefits. Those who are entitled to receive the benefits of the trust are called the beneficiaries.

For example, you might wish to set aside $10,000 for the future education of a newly born grandson, Max. In this case Max is the beneficiary. Your friend Jim agrees to act as trustee. The trust agreement says that Jim is to hold and invest the $10,000 until Max is twenty one. Then everything that has been accumulated is to be paid out to him and the trust will end. It’s pretty nice of Jim to take on this serious responsibility of carrying out your wishes. If you don’t have a good friend or family member who will do this, there are professional trust companies that perform these services for a fee. Or, you can even act as trustee yourself. You can declare that you are holding the $10,000 for your grandchild and if the proper rules are contained in the trust agreement the law will treat the money as belonging to the trust and not to you.

You can even create a trust with yourself as both trustee and beneficiary. This is common in the arrangement that you probably know about called a Living Trust. Typically, you are permitted to manage and enjoy the trust property during your lifetime and the agreement provides for how it should be distributed at death. You can change or cancel the trust at any time – which means it is a revocable trust. But since your property is treated as if legally “owned” by the trust and not by you, it is not subject to a court supervised probate of your property at death. The inconvenience and expense of legal fees and court documents is avoided simply because your property is owned by this separate legal entity Even though your are the trustee and beneficiary, and you can revise or revoke the trust at any time, if the proper language is included, the trust will be a separate and distinct legal entity for probate purposes.

Avoiding probate in this manner accomplishes a great deal without any meaningful restrictions on what you can do with your property. That is because the legal definition of what is “owned” by you is very flexible for purposes of determining whether your property is subject to a probate. The law allows you to escape the definition of “ownership” in a fairly simple manner because state governments have no financial interest in requiring a probate of a decedent’s property. Probate, which is a court supervised inventorying of assets, a payment to creditors and a supervised distribution to specified beneficiaries, consumes limited court resources and takes time from judges without contributing any offsetting revenue. There is no economic benefit from the probate process for anyone other than the lawyers involved in the court process. Consequently, avoiding probate through the use of a funded Living Trust (or joint tenancy arrangement) is encouraged by law and is fairly simple to accomplish in most states.

As far as I can tell, the biggest obstacle to avoiding probate with a Living Trust is that in many states, mostly on the east coast, lawyers are still reluctant to recommend estate plans which include a Living Trust. Legal fees for handling probate matters can be significant, even for smaller estates and so the usual practice is for the attorney to recommend an estate plan which includes a Will but no Living Trust. Future probate fees represent a solid bankable annuity for the attorney who prepares the Will so a Living Trust is usually not part of the plan. If there are other reasons for not including a Living Trust as a part of an estate plan, I’m just not aware of them but I’m always interested in learning something new. In California, and the West Coast, the level of client awareness of the probate problem seems to be higher and very few attorneys prepare estate plans which do not include a Living Trust.

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