What is a Trust, and how does it work?
What is a Trust, and how does it work?
A trust is a legal agreement between two or more people to ensure your wishes are followed both during your lifetime and after your death.
In order to understand how a trust works, you need to understand the three (3) roles required to create a trust.
Trust maker - a person establishes a list of instructions or intentions that would like to be followed both during their lifetime and after their death.
Trustee - the trustee is the manager of the trust and is responsible for making sure the trust maker’s instructions or intentions are followed.
Beneficiary - this is the person or group of people that benefit from the trust. Oftentimes parents will set up a trust to benefit their children after the parent passes away.
Oftentimes, the trust maker, the trustee, and the beneficiary are the same person during the lifetime of the trustee, but those roles switch when the trust maker becomes incapacitated or dies.
So for example, let’s say you set up a revocable living trust. You create the trust, which makes your the trust maker, and you decide to place your home in the trust so it is now governed under the rules of the trust (the rules established by you).
During your lifetime, with this standard trust arrangement, you may be the primary beneficiary and trustee, meaning you effectively have the same control and benefit over the home as you did prior to it being placed in trust.
But if you becomes incapacitated (for example, you become sick or mentally incompetent and you are no longer willing or able to serve as trustee), then the role of trustee would switch to another person you trust. We call this backup trustee your successor trustee.
For many parents, they may pick one or more of their adult children to serve in that role. For younger parents, then may pick their own parents (assuming they are still relatively young) or they may pick a sibling, cousins, or other close friend to serve in the role of trustee.
Then, upon your death, the successor trustee would follow your instructions to manage and administer the trust for the benefit of your remainder beneficiaries. In other words, under the standard trust arrangement, the beneficiary would shift from you (during your lifetime) to another person or group of persons (often your spouse first, then your children or other family members that you decide on).
At that point, both the role of the trustee and the beneficiary has shifted to someone other than yourself. So, in the situation, where you placed a home on trust, the next step would be for the trustee to read your instructions on what to do with the family home after your passing and make sure the children’s benefit over the home (or the sales proceeds from the sale of the home) are passed in the manner that aligned with your instructions and intentions.
There are many different types of trusts, with different objectives and intentions, but this is the general framework for how a trust works to ensure your wishes are followed in the most streamlined manner possible.
Do you already have a trust, but aren’t sure how it works? I’d be happy to review it for you, and answer any questions you may have.
Would you like to set up a trust? I’d be happy to help you create a trust that addresses whatever concerns you may have.
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