Trusts used to be financial tools only used by the very wealthy. Now, trusts are used to achieve a variety of estate planning goals. Experts say that a working knowledge of trust administration is essential for anyone who plans to leave behind a will.

Although trusts sound confusing, they are actually quite simple. A trust is a contract between three parties. A person can have more than one role in a trust. Sometimes, those three parties are even the same person.

The first party is a grantor or creator. This is the individual who signs documents placing assets in the trust. The second party is the trustee, who manages the assets within the trust according to legal guidance laid down by the grantor. Although the trustee legally acts as the owner of the assets in the trust, they do not have unlimited power. Trustees are governed by various statutes and estate administration provisions that differ from state to state. Finally, the third party is the beneficiary. These people have the right to access income or principal from the trust, depending on the terms. Beneficiaries are usually named at the time the trust is drafted.

Trusts are useful in a variety of situations. Four major categories exist to help attorneys and tax officials define the goals of a trust.

First, a trust can either be living or post-mortem, which means that the trust is either created during the grantor’s lifetime or established as part of a will. There are two types of living trusts: revocable and irrevocable. In a revocable trust situation, the grantor is able to change the terms of the trust at will. Irrevocable trusts cannot be changed.

There are important tax differences between revocable and irrevocable trusts. For example, irrevocable trusts can reduce individual taxation because income and gains taxes are levied against the trust itself. Tax and legal implications differ by state, so it is helpful to get advice from a local professional when considering which type of trust to create.

There are many other types of trusts as well, so it’s recommended to explore all the options with an experienced financial planner or estate planning attorney to find which option is best.

Luis E. Barreto