What Is a Trust?

What Is a Trust?

A trust is an estate planning vehicle by which you create a legal entity (the trust) to benefit someone (the beneficiary or beneficiaries). Your trust must also appoint a trustee – the person or entity that will manage the trust assets during the life of the trust, distributing the income they produce, and ultimately the assets themselves, to your designated beneficiary or beneficiaries.

As a Sacramento estate planning lawyer from a firm like Yee Law Group can explain, there are an almost unlimited types of trusts, but in general, they fall into the following three broad categories:

  1. Living versus testamentary
  2. Revocable versus irrevocable
  3. Funded versus unfunded

Living Versus Testamentary Trusts

A living trust, often called an inter vivos trust, is one that you establish during your lifetime. A living trust takes effect immediately. Conversely, a testamentary trust is one that takes effect upon your death.

Revocable Versus Irrevocable Trusts

When you establish a revocable trust, you have the right to change any of its terms or even revoke it whenever you wish prior to your death. An irrevocable trust, on the other hand, becomes “written in stone” when you establish it. You cannot later change or revoke it.

Funded Versus Unfunded Trusts

A funded trust is one into which you transfer ownership of assets, usually those that produce income or stand a good chance of substantially appreciating in value over time. An unfunded trust consists of the trust agreement only, but into which you transfer no assets. You can, however, turn an unfunded trust into a funded trust by, for instance, taking out one or more life insurance policies on your life and designating the trust as the beneficiary. In this way, your trust becomes funded at your death.

Specific Types of Trusts

Whatever your estate planning goals, objectives and needs may be, a trust option likely exists for you to accomplish what you want to accomplish. Examples of the numerous types of trusts you can choose include the following:

  • Special needs trust to benefit your special needs child or other family member
  • Charitable trust to benefit your alma mater, church or the charitable organization of your choice
  • Asset protection trust to protect your assets from creditors or judgment holders
  • Generation-skipping trust to benefit (usually) your grandchildren while bypassing your children, at least in terms of ultimate ownership of the trust assets
  • Spendthrift trust to protect your assets from a spouse, child or other family member who does not handle money well from ever owning the trust assets outright, but nevertheless providing them with the income those assets produce

Since trusts can be quite complicated in nature, your best strategy when contemplating establishing one consists of obtaining the advice and counsel of an experienced local estate planning lawyer.