What is a Trust?

A trust is a fiduciary agreement between a third party (“trustee”) who holds assets on behalf of a beneficiary or beneficiaries. There are numerous types of trusts, but the main goal of any trust document is to organize your assets and protect your wealth.

A trust is a legal arrangement that can protect assets for the benefit of people who may not be able to take care of themselves. Trusts are often used as part of an estate plan, and they come in many forms. There are trusts that can pay out income or principal at regular intervals, trusts that allow you to decide when beneficiaries receive payments (known as “discretionary” trusts), and even trusts designed specifically for disabled people.

A trust differs from a will, as it allows your beneficiaries to gain access to any assets more quickly than they might otherwise if they were transferred through a will. The main difference between a trust and a will is a trust can go into effect at any time, whereas a will goes into effect after you die. Living trusts are created while you’re alive.

While there are many types of trusts, a major distinction between them is whether they are revocable trusts or irrevocable trusts:

Revocable trusts: Also called a living trust, these allow you to retain control of the assets during your lifetime. These trusts are flexible and can be dissolved at any time, which is useful if your circumstances or intentions change. A major drawback some find in this flexibility is that all assets transferred to the trust are still considered personal assets and are subject to creditors and estate taxes. All revocable trusts become irrevocable after the death of the grantor.

Irrevocable trusts: Irrevocable trusts cannot be changed by the grantor after they are signed and the trust has been funded. All assets transferred to the trust can’t be taken back. That means the assets in the trust are permanently given to the trustee, and the grantor no longer owns the assets. However, the trust assets don’t comprise or contribute to the value of the grantor’s estate, so they’re not subject to estate taxes when they die.

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