Estate Planning 101: How Do Trusts Work?

What Is a Trust Fund & How Do They Work?

Before we jump into how trusts work, we'd like to spend a little time defining what a trust fund is and why people use them. A trust fund is a financial arrangement in which a trustee holds and manages assets for a beneficiary. Assets are placed in the trust by a grantor. Disbursement of the assets is performed as outlined by the terms of the trust.

There are two categories of trust funds: revocable and irrevocable. Revocable trusts remain under the grantor's control while they are alive, and they can be changed or even canceled by the grantor at any time. Irrevocable trusts are managed by a third-party trustee, and the grantor does not retain control of the trust once it is funded.

There are several different types of trusts, including:

  • Asset protection
  • Charitable
  • Marital
  • Medicaid
  • Special needs
  • Spendthrift
  • Testamentary

Typically, trusts are designed to help protect assets from the probate process and estate taxes. In doing so, more of your wealth is preserved for your beneficiaries, and the beneficiaries can more quickly access the funds in the trust. Trusts can also help protect funds from creditors, secure financial support for a surviving spouse or dependent, and even help keep your finances private (when an estate is probated, it enters the public record).

How Trusts Work

As mentioned above, three parties are involved in establishing a trust: the grantor who places specified assets in the trust, the trustee who manages the fund, and the beneficiary who receives the funds (typically after the grantor has passed away). Trust funds work as legal documents and protect the wishes of the grantor as they relate to the financial management of their assets.

To set up a trust fund, you will need to meet with an experienced estate planning attorney (like ours at the Law Office of Alexandra White, PC). Your attorney can help you determine which type of trust is best for your situation and can help you draft all the appropriate documents. State trust laws can vary; therefore, you want to ensure you are working with an attorney familiar with handling trusts in your state.

Next, you must decide who you want to act as the trustee. In some cases, the grantor can act as their trustee; in others, the grantor will need to select a third party to serve as the trustee. Finally, you will fund the trust. Trusts take effect as soon as they are funded.

Do Trusts Have Benefits Over Wills?

While wills are very valuable when it comes to estate planning, trusts do have certain benefits that wills do not. The primary benefit of a trust is that it does not have to go through the probate process. Probate can be lengthy and costly. By placing assets in a trust, you effectively transfer ownership of those assets to your beneficiary before you pass. Therefore, they are not subject to probate.

Another significant benefit of a trust over a will is that a will doesn't take effect until the owner passes away, whereas certain types of trusts can be utilized while the owner is still alive. As such, trusts can be used both to help ensure that someone's end-of-life care is managed according to their wishes and to preserve their assets for their heirs.

Trusts are incredibly versatile and offer a lot of options. Wills are more rigid and focused on the disbursement of your assets after your death and on providing instructions for important matters such as funeral and burial preferences. Both are important estate planning tools, and many people utilize both.

Who Should Set Up a Trust?

Just like wills, trusts are often associated with older and/or wealthy individuals. However, as with wills, many people of varying ages and income levels can benefit from establishing a trust. If you own property, have a retirement account, or have money saved in bank accounts, you may want to consider establishing a trust as part of your estate planning. In particular, those with minor children or other dependents should speak with an attorney about establishing a trust.

While there are many online templates and DIY options for setting up a trust, it is vitally important that you work with an attorney or financial advisor. Online guides and estate planning tools leave too much room for error. Failure to draft your trust documents correctly can have serious consequences. If you are considering setting up a trust or need help with other estate planning documents, contact the Law Office of Alexandra White, PC.