Quick Summary

A trust is a legal arrangement in which a trustee operates and controls assets on behalf of beneficiaries. Beyond estate planning, trusts protect wealth, streamline inheritance, support charities, manage businesses, and safeguard digital assets. This guide covers trust basics, common types, benefits, risks, and the steps to create and fund one.

Thinking of Creating a Trust?

When people first ask, “What is a trust?” they often picture inheritance planning. In fact, a trust is a legal arrangement where a trustee holds and manages assets for the benefit of a beneficiary. Trusts play significant roles in estate planning, business transactions, philanthropy, and global finance.

With blended families, growing digital assets, and increasing privacy concerns, trusts offer flexible ways to protect and control wealth. If you’re considering establishing a trust, keep reading to discover different types of trusts, their specific benefits, and the steps required to create one.

Why Listen To Us?

At Blake Harris Law, we concentrate on asset protection through domestic and offshore trusts and coordination with independent trustees in jurisdictions such as the Cook Islands and Nevis. Drawing from years of legal experience, we handle the formation, funding, and maintenance of trusts to safeguard wealth for our clients with estate, business, and privacy objectives.

What is a trust?

A trust is a legal arrangement in which one party (the trustee) holds assets for the benefit of another (the beneficiary). The trust document sets out instructions for how those assets should be managed, used, or distributed. 

Trusts have been around for hundreds of years, originating in medieval England during the 12th century. Their primary function was to allow landowners to transfer their property to a trusted individual when they went to war. Over time, trusts have evolved into tools for managing wealth, protecting assets, and guiding the distribution of assets according to a person’s wishes.

Today, trusts are used to hold property, run businesses, protect intellectual property, fund charities, streamline estate transfers, avoid probate, and maintain financial privacy.

Foundational Components of a Trust

jigsaw puzzles

There are three key parties in every trust, and each has specific roles and responsibilities.

  1. Grantor (Settlor)

    The grantor creates the trust and transfers assets, known as the trust res, into it. The grantor also defines the terms: who the beneficiaries are, how and when assets are managed and distributed.

    Virtually any asset can be transferred into a trust, including:

  2. Trustee: The trustee operates according to the grantor’s instructions. This party has a fiduciary duty, which means they are obligated to act in the beneficiaries’ best interests, avoid conflicts of interest, preserve and invest assets with care, distribute as prescribed, and maintain good records in order to account for the assets.
  3. Beneficiary: Beneficiaries are individuals or entities designated to receive benefits from the trust. These might be income, periodic distributions, or ownership at termination. The grantor can impose conditions (for instance, age, milestone) so long as they don’t violate public policy.

Types of Trusts

There are several different types of trusts, each serving different purposes. Some of the more common or well-known types of trusts include the following:

  1. Revocable (Living) Trusts

    These allow the grantor to change or cancel the trust during their lifetime. Popular in estate planning because they can avoid probate and offer flexibility.

  2. Irrevocable Trusts

    An irrevocable trust generally cannot be changed once created, these trusts usually cannot be changed unless all beneficiaries agree or by court order. Though less flexible, they offer stronger asset protection and often favorable tax treatment.

  3. Spendthrift Trusts 

    A spendthrift trust allows the trustee to maintain control over the trust assets and their distribution. Further, the beneficiary cannot sell or transfer their interest in the trust. The effect of this arrangement is to preserve the trust property in cases where the beneficiary is financially irresponsible or there is a risk of the assets being mismanaged. Spendthrift trusts can be shielded from creditors, though there are some exceptions.

  4. Special Needs Trusts

    A special needs trust is designed to protect beneficiaries with disabilities while allowing them to remain eligible for government benefits, such as Medicaid or Supplemental Security Income (SSI).

  5. Honorary Trusts

    These are statutory or jurisdictional trusts that serve non-traditional purposes, such as caring for pets or maintaining gravesites, that don’t have human beneficiaries.

  6. Generation-skipping Trusts

    In a generation-skipping trust, an entire generation of beneficiaries is skipped. For example, a person may name their grandchildren as beneficiaries rather than their children. The purpose of this type of trust is to minimize the estate tax burden since the tax is only assessed once rather than at two inheritance intervals.

  7. Charitable Trusts

    Charitable trusts name nonprofits or charitable organizations as beneficiaries. They allow support of causes and may provide tax benefits under applicable laws.

  8. QTIP Trusts (Qualified Terminable Interest Property)

    A QTIP is often used in blended families. They allow a surviving spouse to get income, while the grantor controls who receives the remaining principal after that spouse’s death.

  9. Constructive Trusts

    A constructive trust is not formed by choice but imposed by courts in cases of unjust enrichment, for example, when someone acquires property unfairly, a court may declare a constructive trust. 

  10. Offshore Trusts

    An offshore trust is established in a foreign jurisdiction known for favorable asset protection or tax laws. While legitimate when properly structured, these trusts must comply with reporting rules and international tax regulations.

How Trusts Work: Creating and Managing a Trust

dart board

To create a trust, you must follow a clear sequence of steps. Each step must be carried out correctly and documented to make the trust valid and enforceable.

Step 1: Determine the Right Type of Trust

Start by identifying ‘why’ you need a trust. Is it for asset protection, estate planning, charitable giving, or business planning? Then consider ‘which’ assets to include. Finally, decide whether it should be revocable, irrevocable, charitable, or another type that fits your goals.

Step 2: Draft the Trust Agreement

Work with an attorney versed in trust law to create a trust document that:

  • Names the grantor, trustee, and beneficiaries
  • Specifies how and when assets are managed and distributed
  • Includes clauses for spendthrift, discretionary distributions, etc.
  • Complies with the laws of the jurisdiction(s) involved

Step 3: Fund the Trust

Transfer ownership of assets into the trust, including real estate deeds, account retitling, and business interests. Without funding, a trust is only a document and provides no real legal protection.

Step 4: Appoint a Trustee

Choose an individual, a professional fiduciary, or an institution to act as trustee. The trustee has a fiduciary duty to operate the assets in the best interests of the beneficiaries and must avoid conflicts of interest. Many grantors also name a successor trustee to step in if the primary trustee cannot serve. 

Step 5: Sign and Execute the Trust

Sign, notarize, and witness as required by local law. Ensure any filings or certifications required by the state or foreign jurisdiction are done.

Step 6: Manage and Distribute Assets

The trustee manages investments, pays applicable taxes, maintains records, and distributes assets according to the trust’s terms. Ongoing compliance (state, federal, international) is vital for preserving the trust’s protections.

Benefits of Establishing a Trust

There are numerous benefits to establishing a trust, such as providing a structured approach to distributing assets, protecting wealth, and potentially minimizing tax liabilities. Some of the key benefits of establishing a trust include:

Estate Planning Advantages: One of the primary benefits of establishing a trust is avoiding the probate process, which works to streamline estate distribution and reduce conflict among heirs. Unlike a will, which goes through probate, a trust can result in a faster and more direct transfer of assets.

Asset Protection: Keeping assets secure from creditors, lawsuits, and fiscally reckless family members or minors is another essential benefit of establishing a trust.

Potential Tax benefits: Trusts can also be used to minimize tax liabilities, including income tax. Estate tax savings and reduced tax burdens for capital gains may also be possible, depending on the type and nature of the trust.

Privacy: Unlike wills, trusts allow you to keep financial details and distribution plans private. This helps protect beneficiaries’ identities and keeps sensitive information out of public court files.

Common Misconceptions About Trusts

woman telling secret to her husband

While trusts are powerful financial tools, they are often misunderstood, and myths abound about their benefits and functionality. Here are some clarifications of the most common misconceptions about trusts:

  1. Trusts Are Only for the Wealthy
    Many assume trusts are reserved for high-net-worth individuals. In reality, anyone who wants to protect assets, ensure a smooth property transfer, or provide for minor children or special-needs beneficiaries can benefit, even with a modest asset.

  2. All Trusts Are Irrevocable
    Some believe every trust is permanent and cannot be changed. In fact, revocable trusts can be modified or dissolved during the grantor’s lifetime.

  3. Trusts Eliminate All Taxes
    Trusts are not magic tax shelters. They may reduce estate or income taxes and help with planning, but earnings inside a trust can still be taxable and must be reported according to federal and state law.

  4. Trusts Are Only for Older People
    Trusts are useful for adults of all ages, including young professionals who own property, operate a business, or want to plan for dependents. Early planning often means more flexibility and lower costs over time.

  5. Trusts Always Replace Wills
    A trust can complement a will, but rarely makes one unnecessary. A pour-over will, for example, ensures any assets not already in the trust at death are transferred into it.

  6. Trusts Are Expensive to Set Up
    While complex trusts, such as offshore or multi-beneficiary structures, can be costly, simple revocable or living trusts are often affordable. Legal fees vary by region and complexity, and for many families, the long-term savings outweigh the initial expense.

The Bottom Line

Trusts are powerful legal tools for managing wealth, protecting assets, supporting charitable goals, and simplifying property distribution. Whether you’re an entrepreneur, physician, real estate developer, or other professional facing risk from creditors, lawsuits, or malpractice, the right trust structure offers control and protection.

If you’d like to review your situation and build a trust strategy suited to your goals, schedule a free consultation with Blake Harris Law to explore your options by filling out our contact form or by email at Info@BlakeHarrisLaw.com.

FAQs About Trusts

Wills vs. Trusts?

A will takes effect after death and goes through probate. A trust is activated once it is signed and funded, allowing for private management and distribution during the grantor’s lifetime and after their death.

Do I Still Need a Will If I Have a Trust in Place?

Yes. A “pour-over” will makes sure that any assets not already placed in the trust are automatically transferred into it after death.

What’s the Cost to Create a Trust?

A simple revocable trust may cost a few hundred to a few thousand dollars; complex offshore structures can reach five figures.

Can I Be My Own Trustee?

Yes. With a revocable trust, you can serve as your own trustee while alive and name a successor trustee to take over if you become incapacitated or after your death.

What’s the Best Trust for Tax Planning?

Irrevocable trusts, charitable remainder trusts, or generation-skipping trusts can reduce estate or income taxes.

How do Trusts Work in Different States or Countries?

Trust rules vary by state, and offshore trusts must follow both local and foreign regulations.