The Basics of Trusts in Estate Planning
If you’re updating or reviewing your estate plan or business succession planning, it’s good to be familiar with trusts. They are used in one form or another in many estate plans and they often provide the flexibility needed when planning to provide for heirs and loved ones.
Trusts are extremely valuable estate planning tools. They are used extensively in connection with property held for minors, life insurance, marital deduction bequests, credit shelter bequests and charitable transfers.
Generally speaking, a trustee of a trust may be given broad powers to benefit the beneficiaries of the trust. If the trust is irrevocable, and the grantor retains no significant control over it, the trust property can be removed from the grantor's gross estate. Further, a beneficiary can be given big lifetime benefits under the trust without having the trust principal included in that beneficiary's gross estate.
While there are many types of trusts that serve many different purposes, they all share something in common. A trust is a legal agreement among three parties:
- a grantor (also known as the settlor or trustor)
- a trustee
- a beneficiary
A grantor transfers legal title to some property to a trust, then a trustee manages the property for a beneficiary. A trust can have more than one beneficiary, trustee or grantor. Moreover, one individual may assume two or even three of the roles as grantor, trustee and beneficiary. Usually, in this case, the trust will provide for at least one contingent beneficiary, who will become an active beneficiary upon the death of the grantor.
For example, a husband and wife could, as co-grantors, transfer property to a trust with themselves as co-trustees, with the husband and wife both as life beneficiaries, and perhaps with their children as contingent beneficiaries of the remainder interest.
Further, a single trust instrument can establish multiple trusts. For example, the previously mentioned trust could provide that, upon the death of the husband and wife, individual trusts would be established for each child. Again, one person may assume all three roles in the trust.