Trusts

The short version

A trust is a legal arrangement where you (the 'settlor') give assets to someone else (the 'trustee') to hold for the benefit of a third person (the 'beneficiary'). Trusts can help you manage your money and property during your life and after you pass away, avoiding the public process of probate court. They are important for planning how your assets will be handled for your loved ones.

The law this is built on

Every point below comes from the authority named next to it. Verify the current text before relying on it.

Uniform Trust Code (UTC) § 101
The UTC governs the creation, validity, modification, and termination of express trusts. It also covers the duties and powers of trustees and the rights and interests of beneficiaries.
Why it matters: Most states have adopted some version of the UTC, so it provides a common framework for how trusts work across the country.
Uniform Trust Code (UTC) § 601
This section states that a trust is revocable unless the trust document specifically says it is irrevocable.
Why it matters: Unless you clearly state otherwise, you generally have the right to change or cancel your trust.
Uniform Trust Code (UTC) § 602
A settlor can revoke or amend a revocable trust if they have the mental ability to understand the nature and effect of the revocation or amendment. This right belongs to the settlor unless the trust says someone else can exercise it.
Why it matters: You retain control over your revocable trust as long as you are mentally capable. If you lose capacity, someone else might need to act on your behalf if named in the trust.
26 U.S.C. § 671
This federal tax law says that if you create a trust but keep certain powers over it (like the right to take the property back), then any income the trust earns will still be taxed as your own income.
Why it matters: This rule, called the 'grantor trust' rule, explains why the income from many revocable living trusts is still reported on your personal tax return.

Words you need to know

Settlor (Grantor): This is the person who creates the trust and transfers assets into it. You are the settlor of your own trust.
Trustee: This is the person or entity (like a bank) who holds the trust assets and manages them according to the trust document. They have a legal duty to act in the beneficiaries' best interests.
Beneficiary: These are the individuals or charities who will receive the benefits or assets from the trust. You can be a beneficiary of your own trust during your lifetime.
Revocable Trust: A trust that the settlor can change, amend, or cancel at any time during their lifetime, as long as they are mentally capable. Most living trusts are revocable.
Irrevocable Trust: A trust that generally cannot be changed, amended, or canceled by the settlor after it is created. Assets placed into an irrevocable trust are typically no longer considered yours for tax or other purposes.
Living Trust (Inter Vivos Trust): A trust created during your lifetime. It becomes effective while you are still alive, unlike a will, which only takes effect after your death.
Pour-Over Will: A will that works with a living trust. It states that any assets you own in your name at your death that were not already in the trust should be 'poured over' into your trust.

Your rights

✓You have the right to choose the settlor, trustee, and beneficiaries for your trust.
✓If your trust is revocable, you have the right to change or cancel it at any time while you are mentally capable.
✓As a beneficiary, you have the right to receive information about the trust and its administration, unless the trust agreement states otherwise or state law limits this right (UTC § 813).
✓You have the right to name yourself as trustee and/or beneficiary of your own living trust.
✓You have the right to specify exactly how and when trust assets will be distributed to your beneficiaries.

How the process actually works

1
Decide on Trust Type
When you begin your estate planning.
You choose whether you want a revocable trust (which you can change) or an irrevocable trust (which is permanent). Most people start with a revocable living trust.
2
Draft Trust Document
Once you have decided on the trust's purpose and parties.
A legal document is created that names the settlor, trustee(s), and beneficiaries, and outlines the rules for managing and distributing the assets. This document must meet state law requirements to be valid.
3
Sign and Notarize
After the document is drafted and reviewed.
You, as the settlor, sign the trust document in front of a notary public. Some states may require witnesses in addition to a notary.
4
Fund the Trust
Immediately after the trust is created, and ongoing as you acquire new assets.
You transfer ownership of your assets (like bank accounts, real estate, investments) from your personal name into the name of the trust. This is often called 'titling assets to the trust' or 'funding the trust'.
5
Trust Management
Throughout your lifetime, and by successor trustees after your death or incapacity.
The trustee manages the trust assets according to the terms you set in the trust document. If you are the initial trustee of your living trust, you manage your own assets.
6
Distribution to Beneficiaries
As specified in the trust document, typically after your death.
Upon your death, or other events specified in the trust, the successor trustee distributes the assets to your beneficiaries according to your instructions, usually without needing to go through probate court.

Deadlines that can end your case

Trust Funding
No strict deadline, but sooner is better
If assets are not transferred into the trust before your death, they may need to go through probate court before they can be added to the trust, which defeats one of the main purposes of a living trust.
Tax Reporting for Grantor Trusts
Annual tax filing deadlines (e.g., April 15th)
For revocable trusts where you are the trustee and beneficiary, all trust income is reported on your personal income tax return (Form 1040) under 26 U.S.C. § 671. Failure to report income can lead to penalties.

Costly mistakes

✕Not funding the trust: Creating a trust document but failing to transfer assets into it, making the trust ineffective for those assets.
✕Not updating the trust: Forgetting to update the trust after major life events like marriage, divorce, birth of children, or changes in assets.
✕Naming an unsuitable trustee: Choosing someone who is unwilling, incapable, or untrustworthy to manage your assets.
✕Ignoring tax implications: Not understanding how different types of trusts affect income, estate, or gift taxes.
✕Not coordinating with other documents: Failing to ensure your will, beneficiary designations (for IRAs, life insurance), and powers of attorney align with your trust.
✕Keeping poor records: Not maintaining clear records of trust assets, income, and expenses, which can complicate administration.

Your checklist

Identify your assets and decide which ones you want to place in a trust.
Choose your trustee(s) and successor trustee(s), and your beneficiaries.
Work with an attorney to draft the trust document according to your wishes and state law.
Sign the trust document properly, including notarization and any required witnesses.
Begin the process of transferring assets into the name of your trust.
Review and update your trust periodically, especially after significant life changes or every 3-5 years.
Ensure your pour-over will and beneficiary designations are consistent with your trust plan.

Common questions

What is the difference between a will and a living trust?

A will takes effect only after your death and typically goes through a public court process called probate. A living trust takes effect as soon as it's created and funded, can manage assets during your lifetime, and usually avoids probate after your death.

Do I lose control of my assets if I put them in a living trust?

No, not with a revocable living trust. You can name yourself as the trustee and beneficiary, maintaining full control over your assets. You can also change or cancel the trust at any time (UTC § 602).

Why would someone use an irrevocable trust if they can't change it?

Irrevocable trusts are often used for specific goals like reducing estate taxes, protecting assets from creditors, or qualifying for government benefits. Because you give up control, the assets are generally not considered yours for certain legal and tax purposes.

Does a living trust save on taxes?

A revocable living trust generally does not save on income or estate taxes. Under 26 U.S.C. § 671, income from a revocable trust is usually taxed on your personal return. Some irrevocable trusts can offer tax benefits, but that's not the primary purpose of a simple living trust.

Can I be the trustee of my own trust?

Yes, for a revocable living trust, you can name yourself as the initial trustee. You would then manage your assets on behalf of the trust. It's also wise to name a successor trustee to take over if you become unable to manage your affairs or after your death.

How this changes by state

While the Uniform Trust Code (UTC) provides a foundational framework, states can adopt it with their own changes or have entirely different trust laws. This means the specific rules for creating a trust, how it must be signed, the duties of trustees, and the rights of beneficiaries can vary. For example, some states may require witnesses in addition to a notary for a trust, while others do not. You can find your state's specific trust laws by looking up its codified statutes or consulting an attorney licensed in your state.

When you need a lawyer

You should work with an attorney when you are creating or significantly changing any type of trust, especially if you have a complex family situation, substantial assets, or specific goals like tax planning or special needs beneficiaries. An attorney will ensure your trust is valid, properly funded, and aligns with your overall estate plan and state laws. They are also essential if there is a dispute regarding a trust.

Do this today

→Consider your goals for your assets: Who do you want to receive them, and when?
→Gather information about your assets, including bank accounts, real estate, and investments.
→Research estate planning attorneys in your state who specialize in trusts.
→Schedule a consultation with an estate planning attorney to discuss your options and determine if a trust is right for you.

This lesson is legal information for educational purposes only, based on Uniform Trust Code; 26 U.S.C. § 671. It is not legal advice and does not create an attorney-client relationship.