Why Have a Trust? Key Reasons and Benefits for You

A trust is a formal legal arrangement used in estate planning to manage assets and direct how and when they are distributed. By creating a trust, you establish a framework that can operate both during your lifetime and after your death, offering a high degree of control over your financial legacy. This arrangement can be tailored to meet a wide array of personal and financial objectives. The decision to establish a trust is often driven by a desire for privacy, efficiency, and specific outcomes that other estate planning tools may not provide.

Core Concepts of a Trust

A trust is a relationship between three parties. The first is the “grantor,” the individual creating and funding the trust with their assets. The second party is the “trustee,” a person or institution responsible for managing the assets. The trustee has a fiduciary duty to act in the best interests of the third party, the “beneficiary,” who is designated to receive the benefits from the trust. In many arrangements, the grantor, initial trustee, and lifetime beneficiary are the same person, with a successor trustee named to take over upon the grantor’s death or incapacitation.

The most significant decision is choosing between a revocable and an irrevocable structure. A revocable trust, or living trust, allows the grantor to change or cancel the trust’s terms at any point during their lifetime. The grantor can add or remove assets, change beneficiaries, or dissolve the trust entirely. Because of this control, the assets within a revocable trust are still considered part of the grantor’s estate for tax purposes and are not shielded from creditors.

An irrevocable trust generally cannot be altered or terminated once it is established. When a grantor transfers assets into an irrevocable trust, they relinquish ownership and control over those assets. Because the assets are no longer legally owned by the grantor, they are typically removed from the grantor’s taxable estate and can be protected from future creditor claims. This makes the structure a powerful tool for specific financial objectives.

Managing Assets and Avoiding Probate

A primary reason for establishing a trust is the ability to bypass the probate process. Probate is the court-supervised procedure for validating a will, paying debts, and distributing assets. This process can be slow, sometimes taking months or years to complete, and it creates a public record of the estate’s assets and their distribution.

Assets properly titled in the name of a trust are not subject to probate. Upon the grantor’s death, the successor trustee manages and distributes the assets according to the trust document. This transfer happens privately and without court intervention, allowing for a much faster settlement of the estate. This avoidance of probate also ensures that the family’s financial affairs and the grantor’s final wishes remain confidential, as a trust agreement is a private document.

Beyond efficiency, a trust offers unparalleled control over how and when beneficiaries receive their inheritance. A grantor can structure distributions to occur at specific ages or upon life milestones, such as graduating from college. This prevents a young or financially inexperienced individual from receiving a large sum of money all at once.

This control can be further refined through specific provisions. A “spendthrift” provision can be included to protect a beneficiary’s inheritance from their own potential mismanagement or from their creditors. In this scenario, the trustee is given discretion over distributions, providing for the beneficiary’s needs without giving them direct control over the principal. This structure is also effective for blended families, allowing a grantor to provide for a surviving spouse for their lifetime while ensuring the remaining assets pass to children from a previous marriage.

Planning for Personal Incapacity

A trust is a powerful tool for managing your financial affairs in the event of personal incapacity. The trust document contains instructions for what should happen if the grantor becomes mentally or physically unable to manage their own finances. This pre-arranged plan ensures that your assets continue to be managed for your benefit without interruption.

The grantor designates a successor trustee in the trust document to take over upon their incapacitation. The trust defines the process for determining incapacity, often requiring a certification from one or more physicians. Once this condition is met, the successor trustee can seamlessly step in and begin managing the trust’s assets, from paying bills to handling investments.

This private and orderly transition stands in stark contrast to the alternative: a court-supervised guardianship or conservatorship. Without a trust, family members would need to petition a court to have the grantor declared legally incompetent. This legal process is public, can be expensive due to legal fees, and is often a source of stress and conflict among family members. A revocable living trust avoids this entire court process, ensuring your financial life is managed by someone you chose.

Advanced Wealth and Tax Planning

For individuals with significant wealth, trusts are a component of sophisticated tax planning.

Minimizing Estate Taxes

The federal government imposes a tax on large estates transferred at death, though a substantial exemption is available. For 2025, the federal estate tax exemption is $13.99 million per person; however, this amount is scheduled to decrease significantly at the end of 2025. Assets valued above this threshold are subject to a steep estate tax. Certain irrevocable trusts are designed to remove assets from a person’s taxable estate, reducing or eliminating this tax liability.

By transferring assets into a specially designed irrevocable trust, the grantor legally removes those assets, and any future appreciation, from their estate. For example, an Irrevocable Life Insurance Trust (ILIT) can be created to own a life insurance policy. When the grantor passes away, the death benefit is paid to the trust, not the estate, and the proceeds can be distributed to beneficiaries free of estate tax.

Asset Protection

Specific irrevocable trusts can also be structured to provide asset protection. By placing assets into a properly constructed irrevocable trust, a grantor can shield those assets from potential future creditors or legal judgments. This involves completely relinquishing control and access to the assets, as they are legally owned by the trust. This can be an effective strategy for individuals in high-liability professions or those concerned about future financial risks.

Special Needs Planning

A trust can be used for highly specialized planning, such as providing for a beneficiary with a disability. A Special Needs Trust (SNT) is designed to hold assets for the benefit of an individual with a disability without jeopardizing their eligibility for essential government benefits. Programs like Supplemental Security Income (SSI) and Medicaid have strict income and asset limits. An SNT allows trust funds to be used for supplemental expenses, such as education and recreation, without disqualifying the beneficiary from receiving their government assistance.