WHAT IS A TRUST?

A trust is a legal relationship in which one person or qualified trust company (trustee) holds property for the benefit of himself or herself or of another (beneficiary). The property can be any kind of real or personal property--money, real estate, stocks, bonds, collections, business interests, personal possessions and automobiles.

A trust generally involves at least three people: the grantor (the person who creates the trust, also known as the settlor or donor), the trustee (who holds and manages the property for the benefit of the grantor and others), and one or more beneficiaries (who are entitled to the benefits).

Think of a trust as an agreement between the grantor and the trustee. The grantor makes certain property available to the trustee, for certain purposes. The trustee (who often receives a fee) agrees to manage the property in the way the grantor wants.

Putting property in trust transfers it from your personal ownership to the trustee who holds the property for you. The trustee has legal title to the trust property. For most purposes, the law looks at these assets as if the trustee now owned them. For example, many (but not all) trusts have separate taxpayer identification numbers.

But trustees are not the full owners of the property. Trustees have a legal duty to use the property as provided in the trust agreement and permitted by law. The beneficiaries retain what is known as equitable title or beneficial title, the right to benefit from the property as specified in the trust.

The donor may retain control of the property. If you set up a revocable living trust with yourself as trustee, you retain the rights of ownership you’d have if the assets were still in your name. You can buy anything and add it to the trust, sell anything out of the trust, and give trust property to whomever you wish.

If you set up the trust by your will to take effect at your death--a testamentary trust--you retain the title to the property during your lifetime, and on your death it passes to the trustee to be distributed to your beneficiaries as you designate.

We speak of putting assets “in” a trust, but they don’t actually change location. Think of a trust instead as an imaginary container. It’s not a geographical place that protects your car, but a form of ownership that holds it for your benefit. On your car title, the owner blank would simply read “Dale Earnhardt, trustee of the Dale Earnhardt trust.” It’s common to put bank and brokerage accounts, as well as homes and other real estate, into a trust.

After your trust comes into being, your assets will probably still be in the same place they were before you set it up--the car in the garage, the money in the bank, the land where it always was--but it will have a different owner: not simply you, but you (or someone else) as the trustee of your trust.

This may sound abstract, but as this and the next chapter show, the benefits are concrete.

There is no such thing as a standard trust, just as there’s no standard will. You can include any provision you want, as long as it doesn’t conflict with state law. The provisions of a written trust instrument govern how the trustee holds and manages the property. That varies greatly depending on why the trust was set up in the first place.

Trusts can be revocable (that is, you can legally change the terms and end the trust) or irrevocable. A revocable trust (see chapters 11-12) gives the donor great flexibility but no tax advantages. If the trust is revocable and you are the trustee, you will have to report the income from the trust on your personal income tax return, instead of on a separate income tax statement for the trust. The theory is that by retaining the right to terminate the trust, you have kept enough control of the property in it to treat it for tax purposes as if you owned it in your name.

Irrevocable trusts are the other side of the coin--far less flexibility but possible tax benefits. The trustee must file a separate tax return.

For either type of trust, if the amount you give to fund the trust exceeds the federal unified credit, you could incur gift tax liability. Similarly, there may be generation-skipping tax consequences in funding a generation-skipping trust. This is technical territory, where a lawyer’s help is definitely recommended.

Trusts can be very simple, intended for limited purposes, or they can be quite complex, spanning two or more generations, providing tax benefits and protection from creditors of the beneficiary, and displacing a will as the primary estate-planning vehicle.

Fine, Feathered or Furry Friends

Every pet owner knows that pets are part of the family—at least in the hearts of the owners. In 18 states, you can provide for your companion animals directly in your will, and this trend is growing. However, in all states, you can use trusts for this purpose. In some states, you can make your pets the direct beneficiaries of a trust. In others, you can designate a friend or associate as the beneficiary, and make a gift of money and the pets to that person, with instructions to expend the funds on the animals’ care.

Trusts Come in Many Flavors

In a living trust, the grantor may be the trustee and the beneficiary, or you, as grantor can name someone else as trustee and establish many beneficiaries. In trusts set up in your will, the trustee is often one or more persons or, for larger estates where investment expertise is required, a corporate trust company or bank.