What Is a Trust and How Does It Work in Estate Planning

Summary: Trusts can offer flexibility, security and privacy in estate planning, allowing controlled asset management and distribution while typically avoiding probate.

When you think about the future and the legacy you intend to leave behind, it’s natural to want your loved ones well-cared for after your passing. You are probably familiar with wills and how they can ensure your assets are in the right hands after you are gone. You should also consider a trust for the same reason and more.

A trust gives you more than just a way to transfer assets — it can offer flexibility, security and privacy. It lets you dictate how your wealth is managed while you’re alive and how it will be distributed after you’re gone. With a well-drafted trust, legal hassles and delays may also be avoided.

Definition and components of a trust

A trust is a legal entity that allows a person, called the grantor, to give another person, the trustee, the right to manage assets for the benefit of a third party, the trust beneficiary. While it’s true that trusts can help manage large estates, they are equally valuable for anyone who wants a more controlled and private way to manage and distribute their assets.

A trust consists of three main components:

• Grantor: The grantor (also called the settlor or trustor) is the individual who creates the trust. They transfer their assets into the trust and establish the rules that govern how these assets will be managed and distributed. The grantor can set detailed instructions, such as who receives the assets, when, and under what circumstances.
• Trustee: The trustee is the person or entity responsible for managing the trust assets. They are bound by a fiduciary duty, meaning they must act in the best interests of the beneficiaries. The trustee follows the guidelines set by the grantor, whether that involves distributing income or preserving the assets for future generations.
• Beneficiary: The beneficiary is the person or group for whom the trust is intended. This can be family members or charitable organizations, depending on the grantor’s wishes. Beneficiaries receive the financial benefits of the trust, which may include income during the trust’s operation or assets distributed after the grantor’s death.

Types of trusts in estate planning

Trusts come in many forms, each offering distinct benefits depending on what you want to accomplish. There are two common types of trusts:

Revocable trust

A revocable trust, also known as a living trust, is one that you can alter or revoke during your lifetime. This type of trust allows you to maintain control over your assets while you’re alive and ensures they are passed smoothly to beneficiaries after your death, avoiding probate (the legal process of validating a will).

Though revocable trusts are flexible, they don’t protect your assets from creditors or lawsuits since the assets remain part of your taxable estate.

Irrevocable trust

Unlike a revocable trust, it’s not as simple to alter an irrevocable trust and a change could impact exclusion for estate tax purposes. Assets in the trust are no longer part of your estate, offering protection from creditors and reducing potential tax liabilities. This type of trust is often used by individuals with large estates to minimize taxes and shield assets from lawsuits.

Other types of trusts

Aside from revocable and irrevocable trusts, other trusts that you can explore are as follows.

Testamentary trust

A testamentary trust is established through a will and only becomes effective after the grantor’s death. It’s a good option for parents wanting to delay asset distribution to their minor children until they reach legal age. However, since testamentary trusts are tied to the will, they must pass through probate before assets can be distributed.

Special needs trust

A special needs trust provides for the financial well-being of a person with a disability without affecting their eligibility for government benefits, such as Medicare, Medicaid or Supplemental Security Income (SSI). This type of trust ensures that the beneficiary receives support without losing access to essential public assistance.

Charitable trust

Charitable trusts allow clients to meet their charitable, income and legacy goals during life and at death, all while offering the grantor beneficial tax incentives. The two main types are charitable lead trusts (CLTs), which provide income to a charity for a set term or during the grantor’s life, while then transferring property to the family or designated beneficiaries at death, and charitable remainder trusts (CRTs), which give income to beneficiaries for a set term or during the grantor’s life before donating the trust assets to the charity at death.

Real Estate Investment Trust (REIT)

A REIT is a company that owns, operates, or finances income-producing real estate. It pools funds from investors to purchase and manage real estate assets, allowing you to access the real estate market without direct property management. REITs can also be integrated into an estate trust to generate ongoing income for beneficiaries.

However, it is important to mention that REITs come with some associated risks, such as interest rate risks, liquidity risks, tax implications, and associated fees.

How does a trust work?

Trusts are powerful tools in estate planning, giving you ways to manage and protect your assets while ensuring they’re distributed according to your wishes. But how exactly does a trust work in an estate plan?

Asset management

Almost any asset can be placed in a trust, including real estate, bank accounts, stocks, and personal property like jewelry or art.

When you set up a trust, you can transfer ownership of your assets during life using an irrevocable trust or at death with a revocable trust. This can include a wide variety of assets—real estate, investments, and even family businesses.

Avoiding probate

A trust in estate planning allows your assets to bypass probate. Trusts, especially revocable trusts, allow assets to be distributed directly to beneficiaries without court involvement. Since probate is a public procedure, it keeps the details of your estate private while speeding up the process.

Make the right call with your trust

Having a trust can be beneficial to your estate and overall financial plan.

If you are considering setting up a trust, you should clearly define your goals so you can make the appropriate choice. Most importantly, it’s recommended to work with an experienced trust attorney to guide you through the process and draft a trust that works best for you.

Find a Mutual of Omaha financial professional who can work with you and your estate planning attorney to navigate the complexities of setting up and funding your trust.

Looking for more information on estate planning? Start here.

Disclosures:

Registered Representatives offer securities through Mutual of Omaha Investor Services, Inc., Member FINRA/SIPC. Investment Advisor Representatives offer advisory services through Mutual of Omaha Investor Services, Inc.

Mutual of Omaha and its representatives do not provide tax and/or legal advice, and the information provided herein is general in nature and should not be considered tax and/or legal advice.

All investing involves risk, including the possible loss of principal, and there can be no assurance that any investment strategy will be successful.

Not all Mutual of Omaha agents are registered representatives or financial advisors.

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