Estate planning is typically focused on passing assets after you die. But planning may include both wills and trusts to help preserve your income when you are still alive. There are some general features you should know about trusts.
A trust is a legal agreement with at least three people who can serve different roles. More than one person can serve in these roles at the same time.
A trust agreement contains terms governing the trust. A trust cannot fully operate until it is funded through the transfer of property.
The person who created the trust is the trustor, grantor, settlor, or creator. The second person, the trustee, has legal title to the property and manages it according to the trust agreement and Colorado law. The trustee has the fiduciary duty of managing the trust property only in the beneficiaries’ interests and in accordance with the trust agreement and state law.
The beneficiary is the third party and receives the trust’s benefits. Primary or current beneficiaries receive benefits now. These beneficiaries can be followed by contingent, successor or alternate beneficiaries who may receive future benefits.
Types of trusts
A living trust is established during the trustor’s lifetime. Testamentary trusts are created in the trustor’s will.
Revocable trusts allows the trustor to revoke it or change its terms at any time. Irrevocable trusts cannot be changed or revoked except in limited circumstances.
Revocable living trusts or living trusts are the most frequency used. Usually, a married couple creates the trusts and become the first co-trustees and co-beneficiaries. Ownership of most of their other assets are transferred to this trust which they control when they are alive. Trust assets are passed on to heirs instead of a will to avoid the cost and delay of probate.
A revocable living trust is a substitute for a power of attorney. A co-trustee or successor trustee can manage its assets when an initial trustee is unable to.
An irrevocable trust is established to save income or estate taxes. It can also protect assets from creditors.
A spendthrift trust is an irrevocable trust that may be living or testamentary. Beneficiaries and their creditors cannot force distributions. The settlor may use the spendthrift provision if there are concerns that a beneficiary will use assets unwisely.
A special needs trust is established for a person who needs help and assistance for life. It contains terms ensuring that the beneficiary can receive financial support without being disqualified from government aid programs.
Trusts also have different issues with taxes and control. An attorney can assist you with developing a plan that meets your needs.