What Is a Trust? Is It the Same as a Will?

What Is a Trust? Is It the Same as a Will?
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Point Editorial

Simply put, a trust is a relationship established between multiple parties. One party, known as the trustor, grants permission to a second party, known as the trustee, to look after the assets until a third party, called the beneficiary, receives them. 

A trust is essentially a form of legal protection created to decide how individuals can transfer their assets to others, either while they are alive or after their death. Fulfilling specific requirements accompany some trusts, such as coming of age before having direct access to a bank account. Maintaining privacy is also a factor.  

Everything in a trust happens per the wishes of the trustor. Thanks to Hollywood, trusts are commonly associated with wealthier families, but anyone can utilize them to ensure their dependents and heirs are taken care of.  

Trusts take time to establish because one’s wealth and assets take time to grow. Read on as we discuss this topic further in detail. 

How do trusts work?

Trusts are tools used for estate planning. They are legally binding vessels through which one can preserve, manage, and distribute their wealth.

The three primary players involved in the trust process are the grantor, the beneficiary, and the trustee.

Remember, the grantor is also called the trustor. The trustor is the person who creates the trust and assigns their assets to the fund. 

The beneficiary is the person who will receive those assets. 

The trustee is the individual or organization who oversees looking after the trust. 

Types of trusts

Multiple types of trusts exist, a few of which we'll describe below. 

"A" trust

Also known as a marital trust, this is when a person's wealth is transferred to their spouse upon their death. After the surviving spouse passes away, everything is transferred to their heirs, usually their children. 

"AB" trust 

An AB trust is when a married couple sets up a trust fund together. Each spouse transfers assets to the shared fund over time. Beneficiaries of this type of trust can be anyone except the other spouse. When one spouse dies, the trust becomes two separate funds. One of the trusts belongs to the remaining spouse, while the second one belongs to their descendants. 

Irrevocable life insurance trust

An irrevocable life insurance trust is when an individual both establishes and owns a life insurance policy. This type of trust is irrevocable, hence the name, meaning that your wealth funds it and that you cannot change it after creating it. 

Generation-skipping trust

Generation-skipping trusts allow an individual to transfer their assets tax-free to beneficiaries two generations away from them. This type of trust is common between grandparents and grandchildren.

Categories of trusts

Trust funds fall into six categories: living, testamentary, revocable, irrevocable, funded, and unfunded. Each of these categories is described in detail below. 

Living

Also known as an inter-vivo trust, this is a fund created by someone while they are still living. A third party often manages this trust while the individual continues to fund it. 

Testamentary

Testamentary trusts are also referred to as will trusts and outline how an individual’s assets will be distributed after death. 

Revocable 

Revocable trusts can be altered or even terminated during an individual’s lifetime. 

Irrevocable  

Irrevocable trust funds, once established, cannot be changed. Irrevocable trusts are highly desirable, seeing as once an asset has been fully transferred out of an individual’s possession, they are not subjected to as many taxes, if any. 

Funded 

These trusts refer to when an individual contributes assets into a fund during their lifetime. 

Unfunded

Lastly, unfunded trusts consist solely of the trust agreement itself. No funding occurs. 

A will versus a trust

Both a will and a trust are estate planning tools for protection and allocating one’s assets. 

A will is a written document that outlines a person’s wishes upon their death. Distribution of money and guardianships of children are just two facets of many that a will can address. These are usually created with the aid of a lawyer. Wills can only be activated once an individual dies, accompanied by mandatory legal procedures. Loved ones can challenge the will mandates during this process. Finally, everything that is part of the will becomes public knowledge. 

In comparison, a person can activate their trust while still alive and hand their assets down to another party in the same fashion. Trusts offer multiple benefits that wills do not provide, such as allowing beneficiaries to access the trust quicker and giving a trustor more control over how their wealth is distributed. Also, trusts cannot be challenged. Court procedures are not necessary, which means that a judge does not have the final say in how things happen. That, in turn, helps to maintain privacy. Lastly, depending on the trust, beneficiaries may not have to pay estate planning taxes, also known as probate. 

A person can have both a will and a trust. 

How to create a trust

Step 1: First, decide why you want to set up a trust. Do you have multiple valuable assets? Are those assets something that would benefit another party?

Step 2: Gather your documents. It is essential to have all the necessary papers together, such as property deeds, certificates, life insurance paperwork, etc. Having access to these records will make the entire process easier. 

Step 3: Determine the type of trust by thinking about the person or persons you want to receive your assets and any conditions they must meet to acquire them.

Step 4: Choose a service. Options include hiring a lawyer, using an online platform, or doing it by yourself. 

Step 5: Review your assets. It’s always a smart idea to constantly familiarize yourself with all your assets and finances, so you know what they are and how you want them handled down the road. 

Step 6: Choose a successor or successors. 

Step 7: Prepare the actual trust document. Note: Doing so usually comes at an additional cost, as a legal professional handles this step. 

Step 8: Be sure that you name yourself as the trustee of all your assets. 

Point’s contributions 

Finances, assets, and wealth are complex concepts, but being familiar with them and knowing how to navigate these waters is essential. The more information you have regarding your money, the smoother things will be in your world, both now and in the future. 

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