What is a Trust?
By Lee R Phillips
A trust is where one person (called the grantor) gives up property or “grants” property to another person (called the trustee), who is “trusted” by the grantor to take care of the property and use the property, not for himself, but for the “benefit” of a third person (called the beneficiary). A trust is simply an agreement – a relationship – between the grantor and the trustee. The trustee holds title to the property as trustee, but the property belongs to the trust. The trustee is simply taking care of it.
The trust document tells the trustee what he or she is suppose to do with the property and carries out orders or instructions given by the trust. The trustee is bound by law by “fiduciary duty” to handle the property exactly as the trust directs.
Family Trust, Revocable Trust, Irrevocable Trust: Which One?
There are a few different types of trusts you may have heard about. You may know you need a trust but you are not certain what kind you need. Don’t get frustrated. It is not your fault. Attorneys have made lots of different names to make the legal process seem tricky but, there are really only two types of trusts. A living revocable trust or an irrevocable trust and they are very different legal animals.
When someone talks about a “family trust” they are usually referring to the living revocable trust they got for probate avoidance and privacy. It is the most common type. It can be revoked at anytime and is not taxed as a separate entity. That means the “family trust” isn’t going to provide any asset protection. So when an attorney is planning to sue you if he sees the words “family trust” he knows that the assets held in that trust are almost guaranteed to be available for the taking.
An irrevocable trust gives its “owners” lots of asset protection. It can never be revoked and has its own tax number. If you are sued they can’t get the property held there. However when you put property in this type of trust, you are giving up ownership and control. Most Americans like to maintain control, so they opt for the revocable trust.
A living revocable trust can be formed under a number of different names. A loving trust, a family trust, marital trust, land trust and so forth. Often the attorney will include a trust name as part of the “name” of the trust. For instance the name of the trust will read something like, “The John and Mary Doe Family Trust.” That actually tells you nothing about the legal structure of the trust, but it tells someone who is looking to find out what you own information that you do not need to give them.
In fact, I haven’t used the term “family trust” as part of one of my trusts for years. Today, privacy is a major issue, and I advise clients to use an “odd” name for their trust. You can call the trust anything you want. It is much more difficult to find you and your property if you call your trust the JMD Trust instead of using the John and Mary Doe Family Trust format. Including your name in the trust title provides a potential identity thief with too much information. Using a name like the “Pretty Tree Trust” doesn’t give the identity thief any information about who the grantors or beneficiaries of the trust might be. It also doesn’t “tip your hand” as to what type of trust it is.
I expect the term “family trust” to become rarer in the actual title of the trust.
HOWEVER, there is a legal meaning for the term “family trust” that you should know. When a revocable trust is established for a couple, and estate taxes are concerned, the trust will be designed to create a “shelter trust” and a “marital trust.” Assets with a value up to the “exemption equivalent” (the amount of property that can be passed to heirs without an estate tax actually being payable) will be isolated in the shelter trust and the remainder of the assets will be held in the marital trust. The shelter trust is taxed at the death of the first spouse to die, and the marital trust assets are taxed at the death of the surviving spouse. Splitting the trust allows the couple to get more money out of the estate tax free. Estate taxes, shelter trusts, and marital trusts are another topic, that I cover in my book Guaranteed Millionaire. The important thing I wish to point out is that the trust document will refer to the shelter trust as the “family trust,” because the assets in that trust are held for the family’s benefit.
