Many individuals considering their estate plan ask what is a trust? And how is it different from a will?. However, the right answer to this depends upon your needs and your specific situation. If not properly planned, the state potentially can choose the distribution of your assets.
What Is A Trust?
A trust is a tool where one party passes along the authority to another person to distribute or give away certain assets. This is through a trust. To understand what is a trust, there are three main parties involved.
The individual who creates the original trust is the "settlor" or "trustor." The settlor must have a purpose for the trust. These include: what assets will go into the trust, the responsible party of the trust, and the parties who will receive the assets from the trust. Without the settlor, no trust will exist.
To have trust, the settlor must name several identifiable beneficiaries of the trust. This individual(s) or organization will receive the assets of the trust in the way that the trustor decides. The rights of the beneficiary vary depending upon the type of trust.
The trustee is responsible for managing the trust. They must conform to the guidelines that the settlor lays out for them. Additionally, the trustee must be responsible in their role as a trustee. If they act inappropriately, the court can remove the trustee.
Five Types of Trusts
1. Revocable Trust
A revocable trust also called a living trust, is created during the lifetime of the trustor. Additionally, the trustor remains the trustor and trustee of the trust until his death. This is often a smart estate-planning move. It's important to realize that the assets in this trust are unprotected from creditors. If the trustor decides to change his mind during his lifetime, he can cancel or revoke the trust and take his assets back.
2. Testamentary Trust
A testamentary trust is also called a will trust. This type of trust is irrevocable. The assets are then transferred into the trust and an executor is often appointed to watch over how the assets will be distributed.
3. Charitable Trust
A charitable trust has different rules and guidelines to set up. The main difference is that instead of an individual receiving the assets from the trust, a charity will now receive those assets. The charitable trust must be for a public purpose. This means that it must support certain causes such as science, education health, etc.
4. Spendthrift Trust
A spendthrift trust is a very useful tool when there are individuals who have difficulties managing their money. The beneficiary of the trust cannot transfer his interest voluntarily or involuntarily. This offers an additional layer of protection from creditors for beneficiaries. However, certain creditors may have a claim against the income from the trust. These beneficiaries include: the settlor's creditors, claims for alimony, and certain services to protect his/her interest.
5. Discretionary Trust
This type of trust grants the trustee more discretion. It's up to the trustee when to distribute certain assets. The beneficiaries are not able to force the distribution of the assets, only the trustee can make this decision. The trustee must follow the settlor's directions otherwise the beneficiaries can remove him or her.
Talk to an experienced estate planning attorney
There are many considerations and factors involved in choosing this estate planning tool. An experienced estate planning attorney can help explain to you what is a trust and the different types that exist. Our team of estate planning attorneys can help guide you through the process of forming your estate plan. Contact us for a Free Consultation. (772) 774-7771.