One way to avoid probate is through the use of trusts. The most common type of trust used is a “revocable living trust” or a “revocable family trust.” A will requires court supervision and court authority. A revocable living trust contains all of the necessary legal authority inside the trust agreement itself and provides the trustee (the person managing the trust, much like an executor or personal representative) with all the legal authority they need to carry out the trust’s instructions.
What is a Trust?
Many clients tell us “I need a trust. By the way, what is a trust?” Before we can discuss the benefits and uses of trusts, we first need to go over what exactly what a trust is.
A trust is a legal entity like a corporation or an LLC. The person who sets up a trust is called a “Grantor” (or in older terminology, “settlor” or “trustor”). The person who manages or runs the trust is called the “Trustee.” The persons for whom the trust is managed are called “Beneficiaries.” A trust which can be completely changed or undone is said to be “revocable”
An “irrevocable” trust is one that by its design can’t be amended, modified, changed or revoked. In other words, once an Irrevocable Trust has been created, the written terms of the trust agreement are generally written in stone and can’t be tweaked for any reason in the future.
The main reason for setting up an irrevocable trust is for estate and tax considerations. The benefit of this type of trust for estate assets is that it removes all incidents of ownership, effectively removing the trust’s assets from the grantor’s taxable estate. The grantor is also relieved of the tax liability on the income generated by the assets. While the tax rules will vary between jurisdictions, in most cases, the grantor can’t receive these benefits if he or she is the trustee of the trust.
The assets held in the trust can include, but are not limited to, a business, investment assets, cash and life insurance policies.