Why Establish a Trust? Key Reasons and Benefits

A trust is a legal arrangement for managing assets involving three roles: the grantor, the trustee, and the beneficiary. The grantor creates the trust and transfers assets into it. The trustee, who can be a person or institution, holds and administers the assets according to the trust’s rules. The beneficiary is the individual or entity who receives the benefit of the assets.

This structure allows a grantor to set specific terms for how their assets are handled. The trustee has a fiduciary duty, a legal obligation to act in the best interest of the beneficiaries. As a legal entity, the trust itself holds title to the property transferred into it, providing a tailored method for asset management.

The Core Choice Revocable vs Irrevocable Trusts

The initial decision in establishing a trust is choosing between a revocable and an irrevocable structure. A revocable trust, often called a living trust, offers the grantor flexibility. The person who creates a revocable trust retains the right to change its terms, add or remove assets, or dissolve the trust entirely during their lifetime, as long as they are mentally competent.

Many grantors name themselves as the initial trustee of their revocable trust, allowing them to manage their own assets. Upon the grantor’s death, a revocable trust automatically becomes irrevocable, and a designated successor trustee manages and distributes the assets. While these trusts are effective for managing assets during incapacity and avoiding probate, they do not offer protection from the grantor’s creditors. For tax purposes, assets within a revocable trust are still considered part of the grantor’s estate.

An irrevocable trust operates differently. Once a grantor transfers assets into an irrevocable trust, they relinquish control and ownership, and the trust’s terms cannot be easily amended or revoked. This permanent nature is a trade-off for significant financial benefits, such as asset protection and estate tax minimization, which are not available with a revocable structure. These advantages make irrevocable trusts a tool for individuals in high-risk professions or those with large estates.

Managing and Controlling Assets

Incapacity Planning

A revocable living trust is a tool for planning for potential physical or mental incapacity. When a person creates and funds a living trust, they name themselves as the trustee and also designate a successor trustee. The successor is empowered to take over management of the trust’s assets if the original trustee becomes unable to do so. This transition of control can happen seamlessly without court intervention.

The process for determining incapacity is defined within the trust document. It often requires a written certification from one or two physicians stating the grantor is no longer capable of managing their financial affairs. The successor trustee can then present this certification to financial institutions to assume control. This avoids the need for a public and costly court proceeding, known as a conservatorship or guardianship, to appoint a financial manager.

Providing for Minors

Trusts offer a structured way to provide for children or other young beneficiaries. Without a trust, an inheritance left to a minor is controlled by a court-appointed guardian until the child reaches 18 or 21, at which point they receive the entire sum. A trust allows the grantor to specify the exact terms for how and when a beneficiary can access their inheritance.

A common strategy is to schedule staggered distributions based on age, such as one-third of the share at age 25, another third at 30, and the final portion at 35. Until those milestones, the trustee manages the assets, using funds for the beneficiary’s health, education, and support as directed by the grantor. This approach provides for the beneficiary’s needs while protecting the inheritance from youthful indiscretion.

Supporting a Beneficiary with Special Needs

A Special Needs Trust (SNT) holds assets for a person with a disability without jeopardizing their eligibility for government benefits like Supplemental Security Income (SSI) and Medicaid. These programs are “means-tested,” meaning a recipient must have minimal assets to qualify, often as low as $2,000. A direct inheritance could easily disqualify a person from these programs.

In an SNT, the assets are owned by the trust, not the beneficiary, so they do not count against asset limits for these programs. The trustee makes payments directly to third-party vendors for goods and services that supplement government aid. Permissible distributions can include expenses for medical care not covered by Medicaid, personal care attendants, education, and recreation. Trust funds cannot be used for food or shelter, as this could reduce the beneficiary’s SSI payments.

Spendthrift Provisions

Many trusts include a “spendthrift” provision to protect a beneficiary’s inheritance from their own financial decisions and outside claims. This clause legally prevents the beneficiary from selling or pledging their interest in the trust to a creditor. It also bars most creditors from attaching a beneficiary’s interest in the trust to satisfy debts before the funds are distributed.

Once the trustee makes a distribution directly to the beneficiary, that money is no longer protected by the spendthrift clause and can be reached by creditors. This provision is useful for a beneficiary who may be financially irresponsible, has a history of debt, or is in a high-risk profession. It ensures the inheritance is preserved for the beneficiary’s long-term support as the grantor intended.

Enhancing Privacy and Bypassing Probate

Bypassing Probate

A primary benefit of a trust is bypassing the probate process. Probate is the court-supervised legal process for validating a will, paying debts, and distributing assets to heirs. The process is often time-consuming, with an average estate taking six months to two years to settle.

Probate can also be expensive, with costs including court filing fees, executor compensation, and attorney fees that can consume between 3% and 7% of an estate’s total value. Assets properly titled in the name of a trust are not part of the probate estate. Upon the grantor’s death, the successor trustee can manage and distribute these assets according to the trust’s instructions without court approval, making the process faster and less expensive.

Maintaining Family Privacy

The probate process is a matter of public record. When a will is filed with the probate court, it becomes a public document that anyone can access. This means the details of the will, including the assets owned, their value, debts owed, and the identity of the beneficiaries, are open to public scrutiny.

A trust, however, is a private document. Since assets held in a trust bypass probate, the trust agreement is not filed with the court and does not become part of the public record. The details of the trust’s assets and the distribution plan remain confidential, known only to the trustee and beneficiaries. This privacy protects the family’s financial affairs from public view, though some details may be revealed if the trust becomes the subject of a lawsuit.

Achieving Asset Protection and Tax Minimization

Asset Protection

An irrevocable trust can shield assets from potential future creditors. When a grantor transfers assets into a properly structured irrevocable trust, they legally relinquish ownership and control. The assets are then owned by the trust, a separate legal entity. This separation means that if the grantor is later sued or incurs debt, those creditors generally cannot seize the assets held within the trust.

This protection is valuable for individuals in professions with a high risk of litigation, such as physicians or attorneys. This strategy is for protecting against future claims, as transferring assets to a trust to defraud existing creditors is illegal. The effectiveness of this protection hinges on the grantor giving up control, as a court may disregard the trust if the grantor retains too much influence.

Estate Tax Minimization

Irrevocable trusts are a primary tool for minimizing federal estate taxes. The federal government imposes a tax on large estates at death. For 2025, the federal estate tax exemption is $13.99 million per individual, but this is scheduled to be reduced to approximately $7 million per person in 2026. Estates valued above the exemption amount are subject to a tax rate of up to 40%.

By transferring assets into an irrevocable trust, the grantor removes those assets and any future appreciation from their taxable estate. A common example is the Irrevocable Life Insurance Trust (ILIT), which is created to own a life insurance policy. The grantor makes gifts to the trust, often using the annual gift tax exclusion ($19,000 per recipient for 2025), and the trustee uses those funds to pay the policy premiums.

When the grantor dies, the life insurance death benefit is paid to the trust, not the estate. Because the trust owns the policy, the proceeds are not included in the grantor’s taxable estate. This allows a significant amount of wealth to pass to beneficiaries free of estate tax.