What is a trust? A plain-English guide

The short answer: a trust is a legal arrangement in which a grantor hands assets to a trustee, who manages them for the beneficiaries.

• The trustee must act in the beneficiaries' interest
• Mostly used to pass on property privately and without probate court
• Types: revocable, irrevocable and living trusts
• Trust vs. will and how trusts are taxed
• Next step: Plan it with the If Something Happens to Me Binder ($11.99).

What is a trust? A trust is a legal arrangement in which one person, the grantor, hands assets to a trustee, who holds and manages them for the people who will benefit, the beneficiaries. Investopedia's overview of how a trust works describes it as a fiduciary relationship, meaning the trustee must act in the beneficiaries' interest. Trusts are mostly used to pass on property privately and without probate court. This guide is general information, not legal advice. Estate law differs by state, so check your state court's self-help pages or talk with a licensed estate planning attorney before you sign anything.

The three roles in every trust

One person can hold more than one role. In a typical living trust, you are the grantor, the trustee and the main beneficiary while you are alive. A successor trustee you name takes over later.

How a trust works, step by step

1. You decide the goals, such as avoiding probate, caring for a child or giving to charity.
2. A trust document is drafted that names the trustee, successor trustee and beneficiaries, and sets out the rules.
3. You sign it, following your state's formalities, which may include a notary.
4. You fund it by retitling assets, such as a house deed or bank account, into the trust's name.
5. The trustee manages the assets. While you are alive and well, that is usually you.
6. At death or incapacity, the successor trustee takes over and follows the document.

Funding is the step people skip. A trust that is signed but holds nothing does not keep those assets out of probate.

Types of trusts

What is a living trust?

A living trust is set up while you are alive, which is where the name comes from. Most are revocable. You transfer your assets into it, keep using them as before, and name a successor trustee. When you die, that person distributes the assets under your instructions without opening a probate case. If you become unable to manage your money, the successor trustee can step in without a court-appointed conservator for the trust's assets.

Revocable vs. irrevocable trust

Investopedia's pages on the revocable trust and the irrevocable trust explain the trade-off: flexibility on one side, tax and creditor benefits on the other.

Trust vs. will

Many people with a trust also sign a short "pour-over" will. It catches anything left outside the trust and names a guardian for minor children.

Choosing a trustee and successor trustee

The trustee is the most important choice in a trust. A good trustee is organized, honest, available and able to say no to family pressure. Many people pick a spouse or adult child as successor trustee, with a second backup in case the first cannot serve.

A professional trustee, such as a bank trust department or trust company, charges a fee but brings experience and neutrality. That can make sense when the trust will last many years, the assets are complex or family relationships are strained. Some families name a relative and a professional as co-trustees so they share the work.

Talk to the person before you name them. Tell them where the trust document is, who your attorney is and what you hope the trust will do.

What happens to a trust when the grantor dies

With a revocable living trust, the trust becomes irrevocable at the grantor's death. The successor trustee then:

1. Gets several certified copies of the death certificate.
2. Finds the trust document and lists the trust's assets.
3. Notifies beneficiaries as state law requires.
4. Gets a tax identification number for the trust if needed.
5. Pays final bills, debts and taxes from trust funds.
6. Distributes assets or keeps managing them as the document says.

There is usually no court case for assets held in the trust. The trustee still has to keep careful records and act fairly.

How trusts are taxed

A revocable trust is ignored for income tax while the grantor is alive. Its income goes on the grantor's own return. An irrevocable trust is often a separate taxpayer with its own return and tax brackets, which reach the top rate at a much lower income than for individuals. That is one reason trusts often pay income out to beneficiaries. Tax rules for trusts are complex, so ask a tax professional before you set up an irrevocable trust.

Common trust mistakes

Who might need a trust?

A will alone is enough for many families. A trust is worth asking an attorney about if you:

• Own real estate in more than one state, which could mean probate in each.
• Want to keep your estate details private.
• Have minor children and want money released at set ages rather than all at 18.
• Have a beneficiary with a disability who receives means-tested benefits.
• Have a blended family and want to protect children from an earlier marriage.
• Live in a state where probate is slow or costly.

Trusts for children and grandchildren

A trust is a common way to leave money to children. Without one, a minor usually cannot inherit directly, and a court may need to appoint someone to manage the money until the child turns 18. At 18 the child often gets it all at once.

A trust lets you choose the ages instead, such as a third at 25, a third at 30 and the rest at 35. You can also let the trustee pay for school, health care or a first home along the way. Some parents set up one shared trust for all their children until the youngest reaches a set age, then divide it. Name a trustee who is good with money and fair to every child.

What a trust does not do

A trust does not replace every other document. You still need a durable power of attorney for assets outside the trust, a medical power of attorney and a living will for health decisions. Retirement accounts and life insurance pass by their beneficiary forms, so keep those up to date. A revocable trust also does not lower income tax; it uses your Social Security number while you are alive.

Keep the trust and its records easy to find

A trust only helps if your successor trustee can find it. The National Institute on Aging's affairs checklist suggests keeping key documents together and telling someone you trust where they are. The If Something Happens to Me Binder ($11.99, printable PDF) has pages for Read me first, Personal information, Key Contacts, Bank & Financial Accounts, Insurance Policies, Property & Vehicles, Digital Accounts, Where to Find Documents and My wishes. Note the trust's name, date and location, your attorney's contact, and which accounts are titled to the trust.

Related guides: how to make a will, what is probate and power of attorney form.