A trust arranges for one person, called a trustee, to hold property and assets for another person, called a beneficiary. While the property is seen as the beneficiary's in the eyes of the state, the trustee has full control over the property until his or her death. Many people think that trusts are only beneficial for wealthy individuals, this is not the case.

Trusts can be useful for almost everybody, especially those who want to avoid probate after their death. Others may set up a trust to provide for their dependents, to ensure that their assets will be properly managed when they become incapacitated, and to guarantee their privacy, unlike a will. When creating a trust, it is best to consult with an estate planning or probate attorney about the provisions that you should make, so that there are no issues when assets are ready to be transferred.

Types of Trusts

There are two main types of trusts: living trusts and testamentary trusts. While individuals create living trusts during their lifetime, a testamentary trust is created upon their death. This after-death trust is made through the instructions of the deceased's will. It is most often used to transfer money to a person's children and the name the trustee of those assets. Those who are interested in creating a living trust have many different options to choose from, including the following:

Revocable Trust: a trust that can be altered or terminated after it is created. Because the trustee still acts as the owner by potentially changing the trust, he or she will be taxed on that property.

Irrevocable Trust: a trust that cannot be changed after it is created. The trustee of an irrevocable trust gives up the right to the property; therefore, they will not be taxed for it and it will not be available for collection by creditors.

Charitable Trust: a trust that promises assets or property to a charitable beneficiary. The trustee will be able to deduct the tax on whatever property or assets that will be given to the beneficiary. If any assets are given to the charity during the trustee's life time, then the charitable trust must be irrevocable.

Credit Shelter Trust: a trust that transfers the maximum amount of assets possible to the spouse of the deceased person, so that the spouse can avoid estate tax. This is also known as a by-pass trust.

Dynasty Trust: a trust in which an individual can transfer assets to grandchildren and any subsequent generations. This type of trusts minimizes taxes because the whole estate is not taxed at once, but rather with each transfer.

Life Insurance Trust: an irrevocable trust that holds the life insurance of the grantor for a beneficiary so that it is not taxed upon the trustee's death.

Special Needs Trust: a trust in which a trustee gives assets to a person that is already receiving government benefits. Usually, a person becomes ineligible for government income once that person receives money from another source. This trust prevents the funds from making the special needs individual ineligible for government money.

Aside from these types of trusts, there are many more options. An estate planning lawyer can help you decide what trust or trusts are best for you to create. It will depend on factors like your marital status, income, current assets, and age.

Making a Trust

If you've decided that you want to create a trust, then you may be wondering how to proceed. First, you should make sure to contact a qualified probate lawyer in your area. A legal professional will be able to help walk you through the process and explain which option may be best for you. After finding an attorney, you should then figure out if you need an individual trust or a shared trust. If you own much of your property with another person, then you may want to consider a shared trust.

Once you decide if you should pursue an individual or shared trust, you should then think about the property that should go into the trust and who you want to receive the property. After making that choice, you and your lawyer can discuss which type of trust will be most beneficial for you. There are many different kinds of trusts for people in different situations. A specialized trust may help your beneficiaries avoid hefty estate taxes and the probate court.

Next, draft the trust document, sign it, and make sure it gets notarized. This will make it legal in the eyes of the court. Once this step is completed, you should transfer the property to yourself as the trustee. Lastly, keep the document in a protected area and tell your beneficiaries where the document is located.

Learn more about living trusts by visiting the following resource pages:

American Association of Retired Persons

State Bar of California