A trust is a type of legal arrangement in which one party grants legal title to property and assets to another party, who then manages the assets on behalf of a third party. Trusts can be used to hold a variety of assets, including real estate, bank accounts, investments, and personal property. Setting up a trust usually requires the assistance of an estate planning attorney who has knowledge about the different types of trust options available. In general, it involves identifying the trust parties, the trust purpose, and the type of trust.
The first step in setting up a trust is to identify the trust parties. The party transferring the legal title is known as the trustor, settler, or grantor. The party holding the title is called the trustee, and the third party who receives the benefit of the assets is referred to as the beneficiary.
Secondly, setting up a trust requires establishing the purpose of the trust. Different types of trusts are better suited for different purposes. For example, trusts may be used in tax and estate planning, or they may be designed to ensure that assets are disposed of according to a trustor’s wishes once the trustor dies. Additionally, a trust can provide a mechanism to care for dependents, fund scholarships, or to support business operations.
Establishing the trust type is the key final step in setting up a trust. A trust may be entered into as an inter vivos or living trust, meaning that the trust goes into effect while the trustor is still alive. Alternatively, a trust may become effective after the trustor dies. This is typically called a testamentary trust.
When setting up a trust, the trustor must determine whether the trust will be irrevocable or revocable. An irrevocable trust cannot be altered once the trust agreement has been signed, and it is often used in estate planning instead of a will. A revocable trust, on the other hand, can be changed whenever the trustor desires. For example, if a trustor wishes to change the beneficiary or the type of assets covered under the trust, he or she simply needs to complete a trust amendment. Once a trustor dies, a revocable trust becomes irrevocable because the trustor is no longer able to change the will.
In the United States, spouses often use an AB trust when setting up a trust. This type of trust helps ensure that each spouse maximizes his or her personal estate tax exemptions. An AB trust gives a surviving spouse the right to access the deceased spouse’s assets tax free. Once the surviving spouse dies, the named trust beneficiaries have access to the assets, although a portion of the assets may be subject to estate taxes.