How to Create a Trust

Many people create a trust as a supplement to a will. But a trust can also help manage your estate during your life.

What is a trust exactly and how do you create a trust?

Trust Basics

A trust is a legal entity that holds assets for the benefit of a third party of your choice. It is basically a container that holds money or property for somebody else.

Nearly any of your assets can be put into a trust. Some common assets put into trusts are:

• cash
• stocks
• bonds
• property/land
• insurance policies
• artwork

When you create a trust, you are known as the grantor, trustor or settlor. The grantor names people, known as beneficiaries, who will benefit from the trust. The grantor also names a trustee or trustees, who administer and manage the trust and all of the assets contained.

Beneficiaries of a trust are usually the grantor’s family and friends, but anyone can be a beneficiary, including a charity or organization. Beneficiaries receive income or access to assets either during the grantor’s lifetime or after the grantor dies. The trustee can be the grantor, or a spouse, friend or institution, like a bank.

Why You Should Create a Trust

Since trusts can be used for many purposes, they are popular estate planning tools. Trusts are often used to:

• Shield property and other assets from creditors
• Manage estate taxes
• Put aside assets for children until they reach a certain age
• Set up a fund for support in case of job loss or bankruptcy
• Share income taxes among beneficiaries in lower tax brackets

When you create a trust, you should single out your goals. You could create a trust that produces income by putting in stocks or bonds. If you want to create a trust to provide for your family or pay taxes or fees due at your death, you could find your trust with money and life insurance policies.

Revocable vs. Irrevocable Trusts

There are two main types of trusts — living or revocable trusts and irrevocable trusts.

A living or revocable trust is a legal entity that you create to pass assets on to beneficiaries. The assets are not subject to probate — this means the transfer of assets can be immediate or on whatever timeline you desire. Living trusts are also private — unlike wills, they are not part of the public record and no one can view them unless you allow it.

However, living or revocable trusts are not protected from creditors. You cannot create a living trust to avoid estate taxes, and you are subject to income taxes on any money earned by the trust.

Once you create an irrevocable trust, it cannot be changed or rewritten. Irrevocable trusts are great for estate planning, however. You can transfer property to your trust and it is no longer part of your taxable estate. The property is generally protected from creditors as well.

Irrevocable trusts aren’t solely for real estate purposes. You can also create an irrevocable trust for life insurance policies or to generate income.

If you don’t know where to get started, find a legal professional to help you create a trust and manage your estate!