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How does a trust work?

On Behalf of | Feb 17, 2021 | Estate Planning

It is easy to think of a trust as an account that holds assets, but the true definition is that it is a legal document that sets out the holding of assets. A trust is more like instructions than an actual tool. 

Once you understand what a trust is, you can begin to look into how to use one. How Stuff Works explains that you have a lot of flexibility in how you use a trust to leave assets to heirs. 

The basics

Every trust has three parties. You are the trustor who leaves the assets. The trustee is the person who manages the trust and distributes the assets. The beneficiary is the person who receives the trust assets. 

You can use a trust for various reasons. It may be as simple as it is the easiest way to organize your assets. However, you may also use it to lower taxation or protect your assets from debt collectors. You may also choose to use a trust to help you have control over the asset distribution after your death. 

How it works

When you put assets into a trust, you need to choose the type of trust. A revocable trust allows you to maintain ownership and control over the assets in the trust. An irrevocable trust puts the assets under the control of the trustee, and you cannot make changes to them without the approval of the beneficiaries. 

In both situations, you create the trust initially with the details about distribution and any special conditions. If it is an irrevocable trust, you will then sign the assets over to the trust. If it is revocable, then you can continue to use the assets as you want until your death when they go into the trust.