What is It? A trust is a fiduciary relationship in which the settlor (person whose assets will be held in the trust) gives the trustee (trusted party) the right to hold title to assets for the benefit of a third party (called beneficiaries). Trusts can serve a variety of purposes and may offer several benefits in terms of control, taxes, and efficiency.
How does it work? Trustees hold legal title to the trust assets while the trust beneficiaries hold equitable title to the assets.This means that the trustee will be listed as the owner on the certificate of title with the right to control the asset, however, the benefits of ownership (such as income) flow to the beneficiaries.It is possible for adult beneficiaries to be trustees so long as they are not sole beneficiary and sole trustee. For example, the settlor could be both a lifetime beneficiary and a trustee simultaneously. The trust can help guide how assets are managed and distributed while a person is alive, or after their death, and dictate the terms of an inheritance for the remainder beneficiaries.
Trust categories - Every trust fits into one or more of the categories below.
Living or Testamentary
A living (also called inter-vivos) trust is where a trustee manages assets for the beneficiary while the grantor is still alive.
A testamentary trust (also called a will trust) is where a trustee manages assets in accordance with the instructions contained in the settlor’s will after the settlor’s death.
Funded or Unfunded
A funded trust consists of assets put into it by the settlor during their lifetime.
An unfunded trust consists only of the trust agreement with no funding during the settlor’s lifetime, and can become funded upon the settlor’s death.
Revocable or Irrevocable
A revocable trust can be changed or terminated by the settlor during their lifetime.
An irrevocable trust’s terms cannot be changed or terminated except in certain limited circumstances. The settlor has transferred ownership of all the assets in the trust, legally removing the settlor’s rights of ownership to the assets of the trust.
How do you establish one? Trusts are created by settlors transferring property to a trustee for the benefit of someone else. While a writing is not required in Virginia, verbal trusts are generally discouraged because the terms could come into dispute.
Do I need one? Although establishing and maintaining a trust can seem costly, the benefits can outweigh these difficulties. One great reason to establish a trust is to avoid the cost and hassle of probate (the legal process to determine where your property goes after you die).
Another reason to establish a trust is privacy. Most probate documents are part of the public record and are available for inspection by anyone with the inclination. You can find the wills for many famous people online for free. You can see Walt Disney’s will here, or Micheal Jackson’s here, or even Elvis Presley’s will here. Conversely, the terms of a trust are not usually open to inspection by the public and can effectuate the same transfer of assets to your heirs, except discreetly.
A third reason to establish a trust is to ensure property is not given to someone that is unable to prudently manage that property such as someone that lacks legal capacity or perhaps just maturity such as an 18 year old.
A fourth reason for a trust is to protect the property from creditors. A trust can be established so that a creditor cannot seize trust property for the debts of a beneficiary. This is known as a spendthrift trust and in Virginia is even available to settlors in what is known as a self-settled spendthrift trust.
And the final reason to establish a trust is possible tax savings.