Basic Definition of a Trust

A trust is an entity set up which controls certain property based on a set of instructions defined in the paperwork for that trust. The instructions involve what will happen to that certain property—such as cash in a bank account or a piece of real property like a house.

Parts of a Trust

Settlor (also know as the Grantor): The settlor is the person who funds the trust. In other words, the settlor is the person who puts their assets in the trust.

Trustee:  The trustee is the person who manages the trust. The trustee will follow the instructions placed in the trust. The trustee will make sure the assets are distributed to the beneficiaries as described in the trust. The trustee will also keep the assets of the trust in a certain form as described in the trust—with an example being, invested in treasury bills. The trustee might also be given discretion on their actions, such as where to invest the assets—with an example being, there were no specific instructions on where to invest the money in the trust. Therefore the trustee can use their best judgment to invest the money in treasury bills, CDs, or a plain bank account. 

Beneficiary:  The beneficiary is the person who receives a benefit from the trust. For example, the beneficiary might receive a pay out from the trust of $10,000 per year from the age of 24 years to 34 years old—and if there are any remaining assets in the trust the beneficiary will receive the rest of the assets on their 35th birthday. 

Property:  The trust will hold property (example: money in a bank account, an investment account, a house, etc.)

Benefits of Passing on Money Through a Trust

Controlling Dispersal of Assets Over a Period of Time After Death: Money passed on to someone else can be controlled after death with the use of a trust. When money is in a trust, the trustee is obligated to follow of the rules of the trust. An example of a rule would be, the trustee is supposed to give $10,000 per year to a beneficiary of the trust until there is no money left in the trust. This is an excellent way to control the distribution of money to a loved one who might spend the money irresponsibly. This advantage of a trust is beneficial to anyone leaving money after he or she dies—either a lot of money or a little money. 

Avoiding the Time in Probate and the Probate Fee for the Assets Transferred Through a Trust: If money is in a trust before a person dies, the contents of the trust will not have to go through probate. Avoiding probate can give two different advantages. One advantage is that the money can go immediately to the beneficiary after the person dies and therefore eliminate the delays of property going from the person who died to the beneficiary, when probate is involved. Many times probate will take 6 to 12 months, from the start of the process to the end. Another advantage—of avoiding probate—is that the property that does not go through probate will not count towards the probate fee. While this is helpful for anyone, there is only a significant savings when the possible amount of property going through probate is high. For instance, the probate fee for transferring $50,000 through probate is approximately $300. And, the probate fee for transferring $1,000,000 is approximately $3,000.