A trust is a type of designated fund that people will often create to help them organize their wealth and spending needs. The creator of the trust is called the “grantor”. This is the person who devises all the rules for the trust according to specific legal guidelines.
There are various types of trusts, including revocable trusts and irrevocable trusts. Revocable trusts can be altered or even revoked by the grantor after its creation; irrevocable trusts cannot be altered once created.
Trust creation generally begins with the grantor deciding that they want to place certain assets in a trust for the benefit of another person. The person who receives the benefits of the trust is called the “beneficiary.” A person called the “trustee” is then designated to manage the trust. This can be the same person as the grantor; however, it is often a different person.
Then, wealth is moved from the grantor’s possession into the trust, in the form of gifts. These financial amounts are invested based on the rules of the trusts that were set up.
Trusts have recipients and beneficiaries who are also designated to receive the rewards of the trust. The grantor is allowed set rules for how the beneficiaries can access the trust, such as at what age, how often, and how much money they can withdraw at one time.
Thus, to summarize, there are three main categories of persons in relation to a trust:
- Grantor: The person creating the trust and transferring the funds;
- Beneficiary: The person receiving the monetary amounts in the trust; there can be more than one beneficiary for a trust; and
- Trustee: The person tasked with managing the trust fund (this can sometimes be the same person as the grantor).
Are There Different Kinds of Trusts?
Yes. There are various categories of trusts, each with different specifications and legal requirements. The choice of trust type depends on several factors, including the needs and desires of the grantor, as well as the basic purpose for the transfer.
Some of the more common types of trusts include bypass trusts and special needs trusts. A bypass trust can be referred to as a family trust or marital trust. It is generally intended to help married people manage the expense of estate tax in the most efficient way. Special needs trusts are set up for people who aren’t able to earn their own living because of disabilities or other illnesses.
Spendthrift trusts can be created for people whom the grantor thinks might not be able to manage their money and will quickly spend it. Life insurance trusts help beneficiaries avoid the estate taxes and other costs that a life insurance policy would typically require. A living trust is created so that in the event of the grantor’s death, the assets will pass quickly to beneficiaries without the lengthy and expensive process of probate.
Other types of trusts include:
- Charitable Trust: These are created to help gather funds for use in benefitting a specific charity or for the public good.
- Custodial Trust: This is a type of revocable trust that benefits a beneficary who is incapacitated or who has a disability.
- Discretionary Trust: This type of trust delegates discretion to the trustee to decide when and how to distribute trust assets to the beneficiary or beneficiaries. Discretionary typically trusts do not set up fixed distributions, but instead provide general guidelines for the trustee.
- Dynasty Trust: This is a trust that skips generations at named intervals. It is designed to minimize taxation of large amounts of family wealth as it is passed to following generations.
- Land Trust: These are land-ownership arrangements wherein the trustee holds title to the land. The beneficiary is granted the power to direct the trustee, manage the property, and draw an income from the trust.
- Testamentary Trust: This type of trust is often included under the terms and conditions established in a will and takes effect when the grantor dies.
Thus, one of the first and most important steps when creating a trust is to select which type of trust is needed. In order to do this, the grantor will need to determine what their exact needs and desires are in passing on the funds to the recipients.
How Can I Create a Trust?
There are several steps to creating a trust. These may require the guidance of a trust lawyer, who can help determine what the ideal setup is. Some steps that you will need to take may include:
- Deciding what you want the trust to accomplish;
- Selecting the type of trust that will accomplish your specific financial goals
- Designating a trustee (if needed; not all trusts require one);
- Selecting the beneficiary or beneficiaries;
- Discussing the trust guidelines with a lawyer and ensuring that it can manage and transfer assets according to your needs; and
- Having a lawyer draw up the trust in a binding legal document.
If you need to alter or amend your trust because of a change in your wealth or who you would like as a beneficiary, consult your lawyer. This is also a complex process that requires proper guidance and oversight.
What Types of Legal Issues are Connected with Creating a Trust?
Trust creation can involve many different legal conflicts and disputes. While most of the decision-making is in the power of the grantor, some of the other actors may have issues with the trust arrangement.
Some common trust issues connected with its creation include:
- Disputes over who the named beneficiaries are;
- Disputes over selection of the trustee and the extent of their fiduciary duties;
- Questions or concerns regarding the type of trust selected; and
- Issues with setting up a trust in a way that violates the law.
Do I Need a Lawyer for Help with Creating a Trust?
Yes. Estate and trust law is a complicated area of law, and you will likely need an attorney for help. It is in your best interests to hire an estate lawyer, who can guide you through the process of creating and setting up a trust.