Trust definition: a relationship created at the direction of an individual, in which one or more persons or institutions hold the individual’s property subject to certain duties to use and protect it for the benefits of others
People can use trusts while they are alive and after death to control how their property is distributed. If the trust is created by a will, it is called a testamentary trust. If it is created while the trustor or settlor (the person creating the trust) is alive, it is an inter vivos trust.
Trusts can be created for a variety of reasons. For example, a parent can leave money in the care of a trustee to be given to her child when the child reaches a certain age. This is often done to protect children who are too young to handle large amounts of money.
Other reasons for creating a trust include providing income for disabled beneficiaries who may lose their entitlement to government assistance if they own more than a certain amount of assets or for a spouse or other beneficiary who cannot manage their share of the estate’s assets.
You might also want to create a trust to hold title to assets that will be distributed to creditors if the estate is insolvent (more debts than assets) or to reduce or defer taxes or preserve pension benefits that are payable to the estate.
It should be noted that the trustee (the person who holds the property) has a fiduciary duty to the person who created the trust and the beneficiaries of the trust. The trustee has legal title over the property in the trust but does not have the legal right to benefit from the property. This right is called equitable title and it belongs solely the beneficiaries of the trust.
Trust vs Will
Some people create an irrevocable inter vivos trust instead of a will. The advantage of this is that you can reduce probate fees because you no longer own the assets—they are the property of the trust. The person who creates the trust acts as trustee, managing the property in the trust, until his or her death. After death, a successor trustee takes over to settle the trust and distribute the property to the beneficiaries.
Another advantage is that the successor trustee can take over the person’s estate before death if the person becomes unable to handle his or her affairs. The trust will specify how mental incapacitation is to be determined. The successor trustee would distribute your property as outlined in the trust and would be able to manage your money and property for you.
The downside is that you may still need a will even if you have a trust to cover any property that is not held in the trust. In addition, irrevocable inter vivos trusts are more expensive to create than wills. Your estate lawyer and possibly tax accountant will help you determine whether a trust or will is right for you.