In previous posts, I have discussed different types of trusts and the roles they can play in a variety of estate plans. These posts have addressed living trusts, irrevocable trusts, charitable remainder trusts, and gun trusts, among others.
In this post, however, I will discuss the basics of trusts, in order to provide a basic understanding for those who may benefit from their use.
Introduction to Trusts
Title to trust property is separated between legal and equitable. The trustee has legal title to the property, which he or she holds for the benefit of the trust’s beneficiaries. Consequently, therefore, the beneficiaries hold equitable title to the property.
The settlor—or creator—of the trust may be both the trustee and the beneficiary, so long as the remainder goes to someone else. For a trust to exist, the trustee must owe a fiduciary duty to someone other than him or herself.
This is particularly important when considering living trusts. A settlor cannot simply create a trust for his or her sole benefit because a trust cannot exist where no duties are owed to a third party. Without a duty to a third party, there is no real division between equitable and legal title.
Some basic terms important to understand include:
- Inter vivos trust: a trust created during the life of the settlor.
- Testamentary trust: a trust that arises from a will. The settlor is dead when it comes into existence.
- Pour-over will: a will that leaves the testator’s property to a trust that already exists.
Basic Advantages of Trusts
As discussed in previous posts, one of the great advantages of the trust is that its property avoids probate. This can save a significant amount of time and money and keep the terms of an estate plan private.
In addition, trusts are generally more difficult to challenge than a will and there are less formalities to be observed than when executing a will. (For example, witnesses are not required to execute a trust.)
Also trusts are generally more flexible than wills. The rules governing their existence and operation are more liberal, less formal, and more amenable to unique customization.
In this post, I provided some very basic information about trusts and the way they work. In a future post, I will discuss necessary parties and how a trust is formed.