In its simplest form, a Trust is a gift that involves three parties instead of two. The trustee holds legal title to the property held in trust and the beneficiary holds an equitable interest. A Trust not a document, but a relationship. If your mother gives you $10.00 and tells you to use it to buy your daughter a toy, she has created a trust.  She is the grantor; you are the trustee; and your daughter is the beneficiary.

Trusts don’t even have to be written, although there should be a document that sets out all of the terms of the trust. In North Carolina, Trusts can be created by a court, by transferring property to a trustee during the grantor’s lifetime, by Will, or by a declaration by the owner of property that he holds property in trust for another.

Trusts were first used in feudal England as a way to avoid strict laws of inheritance. In the 1500s, England passed a law called the Statue of Uses that required trusts to have a purpose other than getting around the laws. Over time, Trusts developed into a method of maintaining wealth and transferring it to successive generations.

Trusts can be arranged in many different ways to accomplish many different things. They can be revocable or irrevocable. They can be taxable to the grantor or the beneficiary or can be their own entity for tax purposes. A Trust that is taxable to the grantor for income tax purposes may nonetheless be outside of the grantor’s estate for estate and gift tax purposes.

Trusts can be created to do many different things. But you must understand the trust agreement and the laws governing the trust to make it work. Many people pick up their estate plan from their lawyer’s office and stick it in a drawer. They don’t read it or understand it. That is like buying the latest iphone, putting the instructions away, and using it only to make phone calls. While there is nothing wrong with doing that, you could have bought a flip phone instead. Similarly, many Trusts are not used to their full potential because the parties don’t understand them.

One of the most common types of Trusts is a revocable Trust. A revocable Trust allows you to remain in control of your assets while you are able and write the rules for what happens upon your death or disability. It can be changed or revoked at any time you are able to change it. If used correctly, they avoid probate and guardianship, keep financial matters private, and provide greater incapacity protection during life.

Another common type of Trust is a testamentary Trust created at the grantor’s death. They can created by Will or by a revocable Trust. We often see Trusts for minor beneficiaries in older Wills or revocable Trusts. However, there are many reasons to consider creating Trusts for adult beneficiaries as well. We believe that large distributions to beneficiaries should almost always be left in trust. This type of Trust becomes irrevocable after death of the grantor.  

Lifetime, or inter vivos, irrevocable Trusts are also commonly used for many different purposes. This type of Trust cannot be revoked once they are created.  However, we do often try to build in some flexibility. The grantor usually transfers assets into the Trust and no longer has control.  Irrevocable Trusts are often used to remove assets from the grantor’s estate for either tax purposes, gifting, or asset protection purposes.

While the definition of a Trust is simple, the creation and use of Trusts definitely is not. Trusts are tools that may or may not serve your needs. Every situation is different. We take the same approach for every client. We look at your relationships, your goals, and your assets to determine the best strategies to meet your specific needs.