Though no two trusts are exactly alike, a trust is defined as legal arrangement that involves three parties — a grantor, a trustee, and a beneficiary. A grantor is the person who initiates the arrangement so that another person — known as the trustee — will take full control of money or property. The beneficiary is the person who will ultimately receive what the trustee holds for the grantor. A grantor must be alive to initiate a trust, but trusts often outlive them.
There are many reasons why one would create a trust. Perhaps the beneficiary is too young — or too irresponsible, as in the stereotypical “trust fund baby” — to make responsible financial decisions. Perhaps the beneficiary is mentally unfit to responsibly manage money. Trusts are often initiated as a step in estate planning. Some older folks may put their assets in an irrevocable trust in order to show that they have minimal “countable assets” and be eligible for Medicaid payments for nursing home care — thus protecting an inheritance for their heirs that could easily be spent on their long term care. For wealthy individuals, putting their estates in a trust before they die is one way to avoid paying high estate taxes. The IRS will tax any estate valued at more than $5.49 million at a whopping 40% rate, a bite that is unthinkable for many who accumulated such wealth. Regardless of whether your parents have a whale or goldfish sized estate to pass on, it’s worth having a talk about trusts.