Creating a trust can help you pass down property and belongings to your heirs.
A trust is one way to pass down property and belongings to your loved ones and heirs
One of the most significant benefits of a trust is avoiding probate court
A trust also allows more control over how your beneficiaries use the trust assets
Some types of trusts help minimize estate and income tax or qualify for government benefits
A trust is a legal entity in which you can place your assets to be used by you or your future beneficiaries. Like a last will and testament, a trust has rules about which assets go to whom and how the assets can be used. When you pass away, you want to be confident that your belongings and property will go to the right people. Creating an estate plan will help you do that, and a trust can be part of it.
Trusts can also be used while you're still alive. You could, for example, create a trust fund for your children's future education expenses. With Policygenius, you can create a living trust as part of your estate plan with easy-to-use, attorney-approved tools. With other kinds of trust, like an irrevocable trust, you relinquish your ability to cancel the trust or modify its terms, in return for certain benefits like minimizing income tax or protecting assets from creditors.
We'll talk more about how a trust works, its benefits and disadvantages, and the difference between types of trusts, including revocable vs irrevocable.
Here’s an overview of how a trust works, which may not be as complicated as you think:
You create a trust document
You transfer assets into the trust
Your trustee distributes assets from the trust
You can create a revocable trust right now with Policygenius, if you start an estate plan with the Plus package.
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The trustmaker, called the grantor, trustor, or settlor, creates the trust by drawing up a trust agreement. This legal document includes all the information about how the trust works, including names of the grantor, trustee(s), beneficiaries, and all of the trust's assets.
The trustee is appointed to manage the trust and they have a fiduciary duty to act in the trust’s best interests. The trustee can be the same person as the grantor (a grantor trust), but it can also be a lawyer, a financial institution, or any other person you choose. (Depending on the type of trust you have, the grantor may not be able to fulfill both roles.) If you're the grantor and trustee, you must name a successor trustee to take over when you die.
The grantor decides what assets should be placed in the trust. You can add your car, your rare book collection, and even put your house in a trust. You may also want to fund it with money and bank accounts, too.
See a full guide on how to set up a trust.
The trustee distributes assets according to the trust agreement. That might mean beneficiaries receive trust assets upon the grantor’s death. But it could also mean beneficiaries receive trust income as soon after the trust as established. It all depends on the trust.
Once an asset has been disbursed to the beneficiary, the beneficiary becomes the owner of the asset. Even if the grantor is alive, they cannot recover disbursed assets.
Learn more about the distribution of trust assets to beneficiaries.
A last will and testament is another way to pass assets on to your heirs. Trusts and wills can often work in conjunction with each other. (You can create a both a will and living trust with Policygenius, when you select the Plus package.)
For example, your will can create a trust upon your death, called a testamentary trust. You can also use a will to move assets into a trust that already exists.
Is it better to get a trust or will? Learn about a trust vs. will.
There are two main ways to categorize trusts: irrevocable and revocable trusts.
A revocable trust can be modified by the grantor. It is also called a living trust or inter vivos trust, because it's created while you're alive. When you die, your revocable trust typically becomes irrevocable (because you're dead and can no longer make changes to it).
With a revocable trust, your beneficiaries can access the assets as long as the terms of the trust agreement are met. You can continue adding or removing trust property, changing the beneficiaries, and updating the rules governing the trust. However, you'll have to claim the trust assets in your individual tax return and pay income tax on any earnings.
See if a revocable trust is right for you.
An irrevocable trust can't be modified or revoked except when required by law and even then only under very specific circumstances. When you move an asset into an irrevocable trust, you no longer own the asset, and will face some difficulty getting it back, depending on the state.
The tradeoff for this loss of ownership is that you may be able to avoid being forced to use any assets in an irrevocable trust to pay debt or liabilities. Think of the irrevocable trust like another person; if you did the crime, why should the (irrevocable) trust pay the fine? The irrevocable trust can also minimize the grantor’s taxable income if it is structured properly and has its own tax identification number.
See if an irrevocable trust is right for you.
A trust provides a safe way to allocate your belongings and property and protect them for future use by your loved ones. If you’re thinking about getting a trust consider these reasons:
When you establish the trust, you set the terms, and they are enforced just like a contract. For example, you can draft a trust document that allows your children to access the money in the trust when they turn 30. You can stipulate most reasonable conditions that you want; it's common to lock down assets in a trust fund for a child's educational expenses or a mortgage.
You can also limit the amount of money a trust beneficiary can withdraw at any time, which you might want to do if you don't have confidence in the spending habits of your children.
Note that your beneficiaries can challenge the terms of the trust in probate court.
Trust assets can usually avoid probate, which is the legal process of proving a will or determining how assets are distributed when there isn't one. The probate process can get expensive, time-consuming, and painful, especially when someone disagrees with how the assets are being distributed and decides to contest the will. (Because the assets in a testamentary trust have not fully transferred over before the person's death, they will unfortunately be subject to probate.)
Additionally, the results of probate aren't private because eventually wills are public and anyone can see what assets you have or who you passed them to. Trust disbursements on the other hand are private.
Learn more about how probate works.
A trust can help reduce income tax and capital gains tax depending on how it's structured. It can also help a large estate reduce or avoid estate tax. If your estate is worth a certain amount, known as the estate tax exemption amount, you will have to pay an estate tax. By transferring your assets into an irrevocable trust, you can minimize the value of the estate and pay less taxes on it, ultimately helping your beneficiaries get a larger inheritance. The estate tax applies to estates worth at least $11.7 million in 2021.
Learn more about the estate tax.
Certain trusts can shield beneficiaries and the grantor from creditors and lawsuits. If your beneficiary is sued or in debt, the assets that are designated for them in a properly structured trust cannot be used to pay for liabilities, since the assets in a trust are owned by the trust.
Learn more about an asset protection trust.
There are a few reasons why a trust may not be right for you.
Trusts can be expensive to set up and maintain: depending on how and where you establish the trust, complex trusts may cost several thousand dollars to start and several thousand more to maintain.
However, you can get a trust for just $280 from Policygenius when you purchase the Plus package, and you'll also get a will.
Consider the nightmare scenario of setting aside money in a trust for your child to use for college only for the child to get seriously ill and rack up huge medical expenses. In that case, it may be difficult or even impossible for the child to access the trust funds. Additionally, if you have a discretionary trust, the trustee is wholly in charge of disbursing assets, which means they may clash with the beneficiary, especially if you choose an unprincipled or dishonest trustee.
If you allocate the trust funds for your beneficiary to buy a house, will your beneficiary still get the funds if he or she moves into a van down by the river? It's important to seek proper legal advice and have an estate planning attorney draft the terms of your trust to avoid such complications.
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Trusts are just one part of your estate plan, but you have several options that can ensure your beneficiaries are taken care of after you're gone.
Here are some ways you can pass down your assets without a trust (or in addition to one.
If you have in-force life insurance coverage when you die, the death benefit will be paid to the primary beneficiaries named in the policy. Life insurance benefits are tax-free if you paid your premiums with after-tax earnings, and they do not have to go through probate. A licensed expert at Policygenius can help you find a life insurance policy that fits your needs and budget.
Read more about how life insurance works with wills and trusts.
You can name a beneficiary to your bank accounts, brokerage accounts, and retirement accounts. Payable- or transferable-on-death accounts do not go through probate.
Learn more about payable-on-death accounts.
States run their own 529 plan to help parents grow their child's college savings fund. You can contribute money to either a savings or investment account for your child's future education expenses.
Elissa Suh is a personal finance editor at Policygenius in New York City. She has researched and written extensively about finance and insurance since 2019, with an emphasis in esate planning and mortgages. Her writing has been cited by MarketWatch, CNBC, and Betterment.
Elissa has a B.A. in Film Studies from Barnard College.
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