Trusts are a great way to put conditions on how, when, and to whom your assets will be distributed after you pass away. However, there are several options and specific terms to know when it comes to setting up a trust, and many people aren't sure of the best path forward.

To help explain, I've put together some frequently asked questions and answers on the subject.

Q: Who are the key players involved in setting up a trust?

A: There are three key players involved in setting up a trust, and there are several different terms for each, which can be a little confusing. The person who originally owned the wealth is called a grantor, donor, settler, or trustor. The person responsible for carrying out the wishes of the grantor after their death is called a trustee, administrator, or fiduciary. The recipient of the trust, or the person who will inherit the wealth, in called a beneficiary or heir.

Q: Does a trust need to be created prior to the grantor's death?

A: Not necessarily. It's a good idea to set up an inter vivos trust, or a trust that is created prior to your death, so that you can be sure that all of the terms are put in place exactly as you'd like them. However, a testamentary trust, or a trust that is created at the time of death under a will, is also an option. In this case, you would need to specify in your will exactly how you'd like the trust to be set up and distributed. 

Q: What is the difference between a revocable trust and an irrevocable trust?

A: A revocable trust is one that the grantor is able to cancel, or make changes to, while they are still alive. This is done through a trust amendment. The downside to a revocable trust is that all assets included in the trust are still considered the grantor's personal assets. This means that any assets held in the trust at the time of the grantor's death will be subject to state and federal estate taxes. An irrevocable trust is one that cannot be changed or cancelled by the grantor after the agreement has been signed. However, the benefit of an irrevocable trust is that it removes the value of the assets from the grantor's estate, sheltering those assets from estate tax upon the grantor's death.

Q: What is the difference between a simple and complex trust?

A: Two common types of trusts are simple trusts and complex trusts. In a simple trust, income is distributed to the beneficiaries. In a complex trust, the grantor gives the trustee some discretionary power when it comes to distributing the income. Allowing a trustee to use discretion could come into play when the beneficiary is a minor, for example. 

Q: In addition to specifying how your assets will be distributed, are there other benefits to setting up a trust?

A: Yes! By preventing your assets from passing through a will, you can avoid probate—a court proceeding in which your heirs and surviving family members can contest your will, and possibly distribute your assets against your wishes. In addition, a trust can protect your assets from creditors, lawsuits, and estate tax.

Do you have questions about trusts that I haven't answered here? Leave a comment below, or feel free to contact me directly, I'm happy to help!