What is a trust? Most of us have heard the word “trust” and most of us have a basic understanding of what a trust is, but few people seem to really understand what a trust is and how a trust functions.
A trust is a contract. It is a contract between the parties to the trust agreement—the grantor, the trustee, and the beneficiary. The grantor is the person who creates the trust, and typically, the person who deposits money into the trust. The trustee is the person who handles the money in the trust, the person who invests the money in the trust. The beneficiary is the person for whom the trust benefits.
There are several different types of trusts. There are revocable and irrevocable trusts. There are testamentary and living trusts. A revocable trust is a trust the terms of which can be changed. An irrevocable trust is a trust the terms of which cannot be changed. A testamentary trust is a trust found in a last will and testament. A living trust is a trust that can exist while the grantor is still living and, therefore, not in the last will and testament of the grantor.
A testamentary trust is revocable while the grantor is living and becomes irrevocable when the grantor dies, because once the grantor dies, his Will cannot be changed and, therefore, the trust in the Will cannot be changed. A living trust can be revocable or irrevocable, depending upon the purpose the grantor is attempting to achieve.
There are multitudes of reasons why a person may create a trust. A person might create a trust for a minor beneficiary, for a disabled beneficiary, for a beneficiary with a drug or alcohol problem, or for a beneficiary with a spending problem.
A trust can be drafted to address any of these issues. The terms of the trust are up to the grantor. The grantor can draft the trust with any terms he wants to put into the trust. For instance, if the grantor wants to say that the trustee can only give the beneficiary money on October 1st of any given year if the moon is full, he can say that. It’s the grantor’s trust, so the grantor is entitled to put any terms he wishes into the trust agreement.
The biggest problem with a trust is that trusts scare people. Because people don’t understand trusts, they typically heap all types of misconceptions onto trusts.
For one thing, people don’t understand how trusts own and can invest assets. A trust, I always tell people, is just like a person when it comes to owning and investing assets. A trust can own any asset that a person can own and can invest any place a person can invest. A person can own bank accounts, stocks, bonds, mutual funds, annuities, and real estate. So can a trust. A person can have multiple bank and brokerage accounts. So can a trust.
But people don’t understand this, even after you tell them. People think a trust is a place, and that once you put money in a trust the money goes to some particular place, trust-land. People think of a trust as a type of investment instead of simply being a vehicle for investing.
The other problem with trusts is that beneficiaries of trusts typically come to resent the trust. For instance, if mom dies and leave her estate equally to her four children but leaves one child’s share in a trust because the child has problems spending money, the spendthrift child will come to resent the trust. Why can’t I have my money when my brother and sisters get to have their money?
Worse yet, if mom named one of her other children to be the trustee of the trust for the spendthrift child, the spendthrift child may grow to resent his sibling trustee. Years after mom’s death, the spendthrift child certainly won’t understand why his siblings got their money, but he has to wait to get his money.
So, a trust can serve very important purposes, but there are also drawbacks to trusts that should be taken into consideration. No one should create a trust without an important purpose to accomplish and without understanding the drawbacks of the trust.