This question comes up a lot.

Trusts are commonly requested for purposes of “avoiding probate,” “maintaining privacy” and “avoiding taxes.” Another common reason is when people want to dole out monthly allowances to their loved ones and not a full lump sum.

If you don’t know anything about probate read here.

But as a synopsis: when you die, your loved ones will go to the probate court and file a petition to administer your “estate” (everything you left behind.)

The probate court will then appoint an executor who will collect all your items and money and split everything in accordance with your will, or, if you died without a will, in accordance with the state’s default intestacy laws.

what is a trust?

A trust is like an agreement. It’s legally considered it’s own entity.

It’s a document where you put a list of provisions on where you want your money to go, and then you appoint a “trustee” to enforce those provisions. The people who benefit from the provisions in the trust are called the “beneficiaries”

For example, you write a document that says my money goes to my kids when they graudate college. And you appoint your wife to make sure that happens.

Your wife is the trustee, your kids are the beneficiaries.

If a trustee doesn’t enforce the provisions, or tries any funny business (lets say your wife runs off with the money), the beneficiaries can bring her to court and legally enforce the trust.

Practically, your wife would likely get removed as trustee.

Revocable trusts

A revocable trust is one that you can revoke. You establish it during your life, so it’s called a “living” trust, and you allow yourself the power to revoke it whenever you want.

Irrevocable trust

An irrevocable trust is one where you do not allow yourself the power to revoke it. Once it’s set in stone, it cannot be undone.

These come in handy for certain tax purposes for wealthy people, or for people trying to stay on government benefits. Some tax avoidance strategies require irrevocable trusts, and pretty much every medicaid or disability planning trust requires the element of irrevocability.

Testamentary trust

Unlike a “living” trust which you established while you were alive, hence “living”, a “testamentary” trust is one that your will creates.

So in your will you declare a trust for when you die and your money goes into that trust. It’s not a living trust because it wasn’t funded during your life, but was established by your will and funded after death.

Avoiding probate

There are some accounts that don’t have to wait for probate approval to get distributed. Read more about probate avoidance here.

A trust is one way to avoid probate. You put all your money into a trust, then when you die the trust gives out the money to your kids automatically instead of going through probate.

Privacy

Trusts keep all your assets private. A will is public information. But your will doesn’t require you to specify your assets or any other personal information. So, if privacy is a big deal for you, a trust is the way to go.

Tax avoidance

There are a few trusts people use for tax avoidance. Mostly QTIP trusts or credit shelter trusts.

I won’t go into the specific details here, that’s for another blog.

But taxes really only affect millionaires. In MA your estate ISN’T taxed at all if your total net worth is under $2m.

In CT, you’re not taxed unless you’re worth over $13.9m

However, in CT that number is going down to $5m.

Anyway, if you are worth over that amount, there are ways to put away money in a trust so it isn’t taxed.

Another common mechanism for the outrageously wealthy is the GRAT trust, which somehow can shelter billions of dollars from taxes. Seems unfair, but, tis’ life.

Lawyers at top firms get paid $2,000/hr to draft those trusts and I have no idea how they work.

The Bottom Line

The bottom line is, don’t overthink it. There’s so much jargon that it’s confusing to get a grasp of trusts if you’re not regularly exposed to them. Contact a lawyer or message me and I can help with your questions.

At the end of the day, if privacy, probate avoidance, taxes (if you’re a millionaire), and doling money incrementally instead of in a lump sum, are issues important to you… then you should consider a trust.