A trust is an arrangement where the owner of property (called the “settlor”, “grantor”, or “donor”) transfers ownership of the property to a legally created entity, which we have named a “trust”. A second person or entity (called the “trustee”) holds, manages, and takes care of the property within the trust on behalf of, or for the benefit of, a third person(s) (called the “beneficiary” or “beneficiaries”). The trust contains all of the directions and rules by which the trustee must abide when holding, managing, and caring for the property within the trust. Note: it is possible for the grantor to be both the trustee and beneficiary of the trust as well.
There are two common trusts—living and testamentary
Also known as inter vivos trusts, living trusts are ones created while you are alive, transferring property from yourself to the trust. A living trust allows you to name yourself as trustee, grantor and beneficiary during your lifetime. These trusts can be either revocable or irrevocable.
A revocable living trust can be amended or revoked at any time by the grantor. Because the grantor has the ability to amend or revoke the trust, and therefore still has control over the property in the trust, the property in the trust is still included in the grantor’s estate upon the grantor’s death. Therefore, revocable living trusts do not provide shelter for assets from federal or state estate tax.
An irrevocable living trust cannot be modified or revoked once it has been established. An irrevocable living trust is usually created to reduce estate and income taxes. It is unusual for the grantor to serve as the trustee of an irrevocable trust without losing the intended tax benefits.
By the terms of your will, testamentary trusts are created after your death. The assets to fund a testamentary trust usually go through probate. A common example of a testamentary trust is one created by a parent leaving assets to a child. The testamentary trust is administered by a trustee until the child reaches a stated age, at which point the assets are then transferred to the child.