Phone: 256-927-7490

What is a Trust?

Apr 05

This question came in last week: “Shane, I have heard a lot about trusts, but don’t really understand what they are and what they do. Can you explain?” Not many people understand what a Trust is and how it differs from a Will. Honestly, the details of a trust can be very complicated and diverse depending on the individual situation. The general idea behind a trust, however, is pretty simple.

According to financial planning experts the first trusts were created as much as two thousand years ago during the reign of Augustus Ceaser. It is thought that a Roman citizen wanted to pass on his property to his children in case of his death; however, because his wife was not Roman the children could not legally take the property. So, he created a will, leaving all his property to a Roman friend who promised that he would use the property to take care of the man’s children. The Roman citizen trusted his friend to do what he wanted with his property, thus the term “trust” came about.

A modern day trust works the same way. When you create a Trust you transfer some or all of your property, assets, bank accounts, securities, real estate, etc. to a person you trust. This transfer is done through a “trust agreement” which is usually recorded at the County Probate office. Once assets are transferred to a trust, they are owned by the trust and controlled by the trust agreement. The payout terms of the trust are up to the person creating the trust, or the “Grantor.” For example, you could draw up a trust that pays out a certain amount of income to you, the grantor, during your lifetime with the remainder passing to certain other beneficiaries at your death, or you could direct that no assets are released from the trust until your death, or that a certain beneficiary doesn’t get paid until he reaches a certain age, etc.

Although there are many differences with wording and types, there are two basic classifications of trusts – a “Living Trust” and a “Testamentary Trust.” A Living Trust comes into effect while you are alive. A Testamentary Trust is carried out after your death from instructions usually given through a will. Trusts can also be “revocable” and “irrevocable.” A revocable trust can be changed, added to, taken from or stopped at anytime by the person instating it. An irrevocable trust, however, cannot be altered.

One of the most important decisions to make regarding a trust is appointing a “trustee” – the person or entity who will oversee and take care of the trust’s assets or “corpus.”  The trustee can generally be any person or business entity. In fact, you can be your own trustee. The trustee must follow the rules and instructions laid out in the trust agreement. Sometimes, people prefer a business entity to be trustee (such as a bank or a trust company) because these entities may be better equipped to properly invest the trust’s assets.

The reasons for creating trusts are as varied as the possible terms and conditions you can place in them. For example, people create trusts for tax purposes, to make sure a beneficiary is old enough to responsibly handle whatever is in the trust, to avoid probate, to protect property from certain entities or to keep property away from certain people. You should always, however, seek the advice of a lawyer, financial expert, or both, when creating a trust.

This column is intended for general information purposes only. It is not intended, nor should it be construed as personal legal advice. The answers to most legal problems rely on the specific facts of your situation; therefore, it is very important that you personally see a lawyer when these situations arise.