SOME TERMS AND CONCEPTS YOU WILL NEED TO KNOW

A trust is a creature of the law in which one party—the trustee—manages any form of property that has been transferred to the trust by the person establishing the trust—the grantor or settlor.  Think of a trust as an empty vessel into which the grantor "pours" property.  The property is known as the trust principal, or corpus.  The trustee has the very highest of legal obligations: a fiduciary duty to manage the property prudently and see that it is used only in a manner, and for the purposes, established by the grantor.  The persons or institutions (e.g., a charity) who benefit from the trust are its beneficiaries, named by the grantor in the trust document.  Trusts can be: Living—meaning only that they are established during the grantor's lifetime, or Testamentary—established by the action of a will.  Furthermore, a living trust can be revocable—subject to termination or modification at any time by the grantor, for any reason or irrevocable (unchangeable).

Testamentary trusts are created by the action of a will through the probate process.  Since the deceased grantor is unable to change the terms of a trust created under his or her will, these trusts are always irrevocable.  However, while living, the grantor is certainly free to change his or her will, including any provisions for a testamentary trust that it will create.  Testamentary trusts might be accountable to and have to report to the court under state law.  The administration of a living trust does not require a trip to probate court, even after the grantor dies. 

If a trust is irrevocable, the grantor is unable to end the trust, modify its primary terms, or take back assets if plans change even in emergencies.  If that is an unacceptable condition, then don't even consider an irrevocable trust.

 

The grantor may, however, reserve the right (personally, or for others down the line) to remove and replace the trustee for poor performance or to make other, small, administrative changes. 

An irrevocable trust is independent from its grantor, under the law.  It is a separate legal entity and must obtain its own tax identification number from the IRS.  It also is essential that the grantor and trustee recognize that an irrevocable trust cannot be used as the grantor's "piggy bank."  Any potential tax benefits could be jeopardized if the grantor has a significant interest in, or control of, an irrevocable trust.

Let's now take a look at the type of trust that has become increasingly popular in recent years, especially by folks anxious to avoid probate.