How Does a Trust Work?

Planning a trust often carries a negative reputation as something that only the wealthiest of families can afford to do. But the truth is, a trust can be made by anyone to ensure that their descendants receive property or assets independent of a will or other arrangement.

But how exactly do trusts work in the grand scheme of probate? Are they subject to the same rules as wills? These are but a few of the many questions we have received over years of practicing estate and trust administration in Michigan.

SSR Law Office is dedicated to ensuring that our clients have a full and clear understanding of how trusts work, as well as how to set up a trust to protect their assets for generations to come.

What is a Trust?

In short, a trust is similar to a will in that both are legal instruments that enable you to direct the disposition of your estate’s assets to benefit people of your choosing.

The main difference between the two is that a will only takes effect after your death, while a trust can begin to operate during your lifetime. Another key difference is that a trust may not be subject to probate supervision, unlike a will, which can be subject to a lengthy probate process if it is disputed in any way.

What Parties are Involved in Trust Planning?

A trust is generally formed between two primary parties—the grantor or Settlor (the person making the trust) and the beneficiary (the person receiving the trust). In some cases, a trustee may be appointed as a neutral third party to ensure that the trust is properly managed prior to the beneficiary receiving the benefits of a trust.

Grantors or Settlors are the individuals establishing the trust, and their primary function is to decide the type of trust meant to be established, and if any conditions (such as the beneficiary coming of age) must be met prior to the trust fund being disbursed.

Beneficiaries are the recipient(s) of a trust fund. In order to receive the benefits of a trust fund, they may have to meet certain requirements (such as survival upon the death of the grantor or age) depending on the guidelines set in place by the grantor.

Trustees are occasionally involved in trust planning, and are essentially a neutral third party whose goal is to ensure that the terms of a trust are honored and respected—especially during the probate process when a will is involved. Trustees are generally a trusted individual but may be a financial institution, a financial advisor or an experienced trust attorney.

What Types of Trusts Can I Create?

As with many areas of financial planning, there are a number of choices that can be made outlining how a trust is handled, disbursed or changed/revoked in the future. These include (but are not limited to):

Irrevocable Trusts, which cannot be changed or modified later. These are described as “iron-clad,” and are the most secure form of trust as they are under the control of the trustee. Since the assets are no longer in the direct possession of the grantor, there is no need to pay income tax on any interest made from the assets, or estate taxes. Similarly, an irrevocable trust would protect assets from creditors or lawsuits.

Revocable trusts may be changed, amended or revoked in the future, and do not receive the same tax benefits that irrevocable trusts do. The additional flexibility may be of interest to parties who may need to change the terms of the trust in case of an emergency.

Special Needs Trusts can be formed to ensure that a child with special needs continues receiving specialized care through a trust fund, especially if you pass away suddenly.   Special needs planning and the creation of a Special Needs Trust may also be used for a variety of life-enhancing expenditures without compromising your loved ones’ eligibility for government benefits.

What Types of Assets can I Include in a Trust?

Despite the popular misconception that a trust can only be formed by wealthy persons, the possibilities of things to place in a trust are virtually endless. A grantor may leave a beneficiary anything from a small amount of cash to an entire portion of their property.

Assets that can be placed in a trust include:

  • Cash, Stocks and/or Bonds;
  • Real estate and/or tangible personal property;
  • Businesses;
  • Life insurance;
  • Loans (being repaid to the grantor);
  • Patents, copyrights and royalties; and
  • Mineral, oil and gas rights.

What are the Benefits of a Trust?

Aside from its advantages over a will, using a trust to manage your assets offers other beneficial and problem-solving possibilities. Consider the following situations:

  • You want to leave something behind for a child of yours, but are concerned that he or she may not be financially responsible enough to not squander a gift or inheritance. A trust can preserve its assets by preventing such a beneficiary from being able to get at them directly.
  • You want to provide for someone with special needs, such as a physical or mental disability, but worry that he or she will not be able to manage the assets you want to provide for his or her care.
  • You want to provide for your spouse after you die, but are concerned about the effect of estate taxes on what you want to leave to him or her.
  • You want to minimize the expenses, publicity and time delays that going through probate can entail.
  • You want to protect high-value assets in your estate from potential loss through legal liability, while retaining the ability to use and control those assets.
  • You may want to protect assets that may go to a spouse from the high cost of long term care in an assisted living or nursing home.

Contact an Experienced Trust Planning Attorney

In some cases, trustees may lack the time, resources or knowledge to personally administer the trust or estate, and therefore may call upon legal, accounting and investment professionals for assistance in trust and estate administration. In moments such as these, where extra assistance may be necessary, consulting an experienced trust planning attorney may be in your best interests.

For more information about trust planning, or to discuss the details of a trust you have made/are intended