In a trust, you:
- Identify the trust property and the purposes of the trust
- Designate the trust beneficiaries
- Appoint a trustee and alternates
- Give instructions to the trustee about managing trust assets and regulating the flow of money to beneficiaries
- Direct the trustee to keep an accounting, preserve records, and send reports to designated persons, as well as carry out the tasks required by law
- A trust is a flexible tool that can be written to suit many different circumstances.
Here are a few of the common types of trusts:Testamentary trust (contingent trust)
A testamentary trust is part of your will and springs into place under specified circumstances. In this example, a testamentary trust provides support in case both parents die leaving minor children:
- Each parent has a will with a testamentary trust
- The trust comes into effect only at the death of the second parent and only if any of their children is under a specified age
- The trust is funded with money and other property, through the will or by beneficiary designation
- The trustee manages the trust assets and makes payments for the support and benefit of the children
- When each child reaches the specified age, the rest of the child's share is distributed to the child as a lump sum
Testamentary trusts can also be used to support other beneficiaries or to manage certain assets. Your attorney can help you decide whether the benefits of a will with testamentary trust justify the additional cost.Revocable trust (living trust)
A revocable trust is created during your life and functions alongside your will after your death.
- You can change your revocable trust during your life, so long as you have legal capacity
- You transfer money and deed property to the trust during your life and through your will
- Typically, you are the trustee and the beneficiary of the trust during your life
- After your death, your successor trustee continues to manage the trust for your beneficiaries according to the trust agreement
- Assets owned by the trust normally pass without probate at death
- A very simple will ("pourover will") allows your trustee to administer assets not owned by the trust at your death
- If a married couple uses a joint revocable trust, each person still has their own will.
A revocable trust can help with planning for possible future incapacity, reducing potential federal estate tax, managing assets that you own separately from your spouse, or dealing with out-of-state or community property. Despite some marketing claims, "avoiding probate" is usually not the main reason to use a revocable trust for people living in a state like Colorado that has more modern probate procedures.
Your attorney can help you decide whether a revocable trust is right for your situation. Paying for a customized revocable trust now may well save your successors money, time, and trouble later.
An irrevocable trust is created during your life and functions separately from your will.
- You transfer ownership of certain assets to the trust
- The trustee has complete (or almost complete) control of the assets
- The assets are removed from your estate and used to support others
- One variation, the irrevocable life insurance trust (ILIT), owns an insurance policy on your life and uses the proceeds to support family members or to pay estate taxes
Variations on the types of trusts described above are often used for specific purposes, such as:
- Charitable trusts
- Multi-generation trusts
- Special needs trusts for the support of an adult receiving governmental assistance
The recordkeeping and other legal requirements imposed on trustees can be burdensome. You may want to consider appointing a professional trustee in addition to or instead of a family member trustee.