Estate planning primer: Trusts and estates

Estate planning primer: Trusts and estates

Key takeaways

For a trust to best carry out your intentions, decide what type of trust will suit your objectives, follow all the rules for that type of trust and make sure all the legal requirements continue to be met over time. Consider working with a local estate planning attorney to assist you.


When you think of a trust, do you think of the ultra-wealthy? If you do, you’re not alone.

Many people may imagine the stereotypical “trust fund baby” when they hear the word. But in reality, trusts can be a great tool for a large number of people who want a tax-savvy means of passing their estate onto their heirs.

Trust vs. estate: What’s the difference?

What is a trust?

So, let’s start with the basics. What is a trust? A trust is a legal entity you set up to hold, safeguard, distribute and control all your assets. Some of the basic building blocks of a trust are as follows:

Property – The assets you place into the trust.

Objective of the trust – There are different types of trusts tailored to meet a variety of estate planning objectives.

Rules/provisions – Clauses in the trust that describe what is to be done with the assets under trust.

For the trust to best carry out your intentions, decide what type of trust will suit your objectives, follow all the rules for that type of trust and make sure all the legal requirements continue to be met over time. Finding and working with a local estate planning attorney to assist you in setting up and managing your trust can help you through this process.

There are several players involved in creating and administering a trust:

Trustor (can also be referred to as grantor or settlor) – The person who sets up the trust.

Trustee – Person(s) or entity that manages the trust’s assets.

Beneficiary – Person(s) or entity that gets the assets in the trust.

Successor trustee and beneficiary – In some situations the trustor, trustee and beneficiary are all the same person. For example, if you have a middle-class net worth, you might want the benefits that a trust provides but don’t want to pay someone else to manage it. This may be especially true if you are already doing most of the management as the owner of your assets. In cases like this, the person creating the trust will assume all of the roles and appoint a “successor trustee” and “successor beneficiary.” The successor trustee takes over if and when the original trustee dies or declines to serve. The successor beneficiary, as you might imagine, benefits from the trust.

What is an estate?

An estate is the sum of your assets at the time of your death. This is anything you own independently, not what is jointly shared with a partner or what has already been transferred and assigned.

The purpose of an estate is temporary: It aids in the distribution of the deceased’s assets. When you die, your assets can be distributed in two main ways:

  1. By will
  2. By inheritance succession laws1

A will contains legal instructions for distributing the deceased’s assets. As the estate owner, you can specify where your assets will go (called a beneficiary) and how your assets will be distributed.

If there is no will (or if a family member wishes to legally contest the will), inheritance succession laws determine how your assets will be distributed. While this varies by state, the general line of “intestate succession” follows this:

  1. Spouse
  2. Child(ren) and other descendants
  3. Other relatives
  4. State (through a process called escheatment)2

Once your assets are distributed, your estate no longer exists.

Benefits of a trust

There are many reasons to set up a trust. Some of the common benefits include:

Avoiding/reducing taxes – Avoiding or reducing estate and gift taxes is probably the most popular reason why people set up a trust. For tax year 2022, you will trigger estate taxes only after you have accumulated assets worth more than $12.06 million per individual. There’s an estate tax marital deduction, which exempts (at least until your spouse dies) all your estate, no matter how large, from federal estate taxes if your estate passes directly to your spouse. Effectively, this means few people need to worry about federal estate taxes. Some states, however, have estate tax provisions that kick in much earlier, so it pays to know the specific state laws where you live.3

Avoiding probate – If you have a will, the assets included in your will must pass through the state’s probate process. The probate process is time-consuming and depending on the state, it can cost anywhere from 3 to 8% of your estate. A trust on the other hand can directly and quickly pass the assets to the beneficiaries.4

Protecting the estate – A properly constructed trust can protect the assets from the beneficiaries’ creditors and lawsuits.

Retaining control of your estate – When setting up the trust, you can dictate how and when you want the estate to be used.

Providing support for minor children or dependents with special needs.

Donating to charities in a tax-efficient manner.

Privacy – Terms of a will and the details of the assets left in a will are usually public while the terms of a trust are not.

The different types of trusts

There are many different types of trusts; some will serve a single purpose, others multiple. Some are set up to function while you are alive, while others work only after you die. Some can be changed, while others are irrevocable.

Even though there are innumerable varieties of trusts, they can be classified into four basic kinds:

1. Revocable trust – This type of trust can be altered, amended or revoked by the settlor at any time.

2. Irrevocable trust – In contrast to the revocable trust, an irrevocable trust cannot be altered once it is created.

3. Inter-vivos trust – Also called a living trust, this trust is created while the settlor is still living.

4. Testamentary trust – Also called a “will trust,” this trust is created at or following the death of the settlor based on the individual’s will.

Depending on the purpose of the trust, it can be further classified into many different types. Some of the common types include:

1. Marital trust (or “A” trust) – Provides benefits for the surviving spouse and the married couple’s heirs. A marital trust goes into effect when the first spouse dies.

2. Bypass trust (or “B” trust) – Created along with the “A” trust, maximizes the use of the decedent’s estate tax exclusion amount to lower taxes.

3. Generation skipping trust – Lets your children use the assets, but keeps them out of the estate to avoid paying estate taxes. Ultimately, the assets are passed down to the grandchildren.

4. Special needs trust – Allows a person with special needs to receive income without negatively affecting their ability to qualify for public assistance such as Social Security and Medicare.

5. Charitable lead trust – Designed to reduce the taxable income of the beneficiaries by donating the income of the trust to a charity and after a specific period of time, transferring the assets to the beneficiaries.

6. Charitable remainder trust – The trust pays the beneficiaries for a specific period of time and then transfers the remainder of the trust to a charity.

7. Spendthrift trust – Protects the assets from irresponsible beneficiaries and their creditors.

The cost of a trust

There are a variety of costs associated with setting up and administering a trust. Some of these costs include:

Setup fees – This includes attorney fees for drafting the required documents such as a will and any durable powers of attorney. The cost of these fees will depend on the complexity of the trust and size of the assets.

Maintenance fee – If you are appointing a bank or a trust company as the trustee (a “corporate trustee”), they will charge an annual administrative maintenance fee. This fee will depend on the value of the trust and the effort involved in maintaining the assets in the trust. For example, if all the trustee has to do is file taxes for the trust, the fee will be significantly less than a trust that requires investment and real estate management. Most middle-class trusts are maintained by the trustor themselves, just as they were doing before creating the trust. The only difference is that now the properties will be in the trust’s name as opposed to the trustor’s name.

Retitling of the assets – After you set up a trust, the assets have to be transferred and re-titled to the trust’s name. The cost of this will vary based on the type and value of the asset, and the state you live in.

It is possible to do most of the process yourself to save on costs, but given the complex laws surrounding estate and trust planning, a small mistake could cost you or your heirs dearly. This is why we generally recommend hiring a reputable estate planning professional — it is better to get it right the first time! While hiring an attorney can be pricey, there are things you can do to save money, especially if you are paying an hourly rate.

Before you set up the initial meeting, prepare a file with the following:

  • Why are you thinking of setting up a trust? What are your objectives?
  • List of all the assets you own and want the trust to hold.
  • Who will inherit your properties and on what conditions?
  • Proof of ownership, such as a deed and other title documents for the assets.
  • Recent appraisal documents, if applicable.

How to set up a trust

When you meet with your estate planning attorney, you should discuss, based on your objectives, whether setting up a trust is right for you. You will also decide on:

  • The specific type of trust you want to create.
  • Who will serve as the trustee.
  • Who will be the beneficiaries.

Once those decisions are made, the process is generally pretty straightforward. Your attorney will draft the trust agreement, a will and the required powers of attorney. Once set up, your trust will have its own Federal Tax Identification Number. The final step will be to transfer the assets from your name to the trust.

The rules of a trust

The rules that govern a trust depend on the type of trust and are spelled out in the trust agreement. In general, a trust agreement may contain:

  • Name of the trust.
  • Purpose of the trust.
  • Name of the trustee, successor trustee, beneficiaries and grantor.
  • How the property has to be controlled and by whom.
  • The powers and duties of the trustees.
  • How the property will be distributed.
  • General trust provisions (depending on the type of the trust).
  • How the trust rules may be altered.

Once a trust is set up, it takes its own identity. Every year the trust has to file taxes. Trusts (except living trusts, for which the income and deductions are reported on the personal income tax return) need to file a Form 1041, which deducts distributed interest from its own taxable income.5 The trustee also has to prepare Schedule K-1 forms for each of the trust’s beneficiaries, which tells them how much tax liability they may have from trust distributions. This Schedule K-1 will have to be included in each beneficiary’s personal tax return.

Is your estate “trust” worthy?

Trusts can be helpful for families of all sizes and incomes, but creating and administering a trust can be a complex, time-consuming and relatively expensive process. But what if you are caring for a child with special needs, have minor children or want to leave your assets for a specific purpose, like the education of your descendants? In those cases, it might make sense to set up a trust even with a slightly lower net worth.

Our take

A trust that is set up in the right way can give you a greater amount of control over your wealth, as well as protect your legacy. But deciding whether to set up a trust, what type of trust is right for you, and what provisions to include totally depend on your individual circumstances and goals. Speak to a loved one about your long-term goals for your accumulated assets. If you decide that you are interested in creating a trust, consult an experienced estate planning attorney to confirm that it’s the best option for you and guide you through the process.

1 LegalMatch, “What Is Inheritance Succession? What Is Intestacy?,” August 2022.

2, “Investor Bulletin: The Escheatment Process,” March 2019.

3 White and Williams LLP, “Gift, estate and generation-skipping transfer tax changes for 2022,” March 2022.

4 The Balance, “How Much Does Probate Cost?,” June 2022.

5, “About Form 1041, U.S. Income Tax Return for Estates and Trusts,” September 2022.


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