Estate Planning: Who Can Benefit from Trusts - T. Rowe Price

As used in estate planning, a trust is a legal entity that has the ability to own assets for the benefit of others. The "grantor" or creator of the trust funds the trust and selects the trustee—the person (which could be you) or institution designated under the trust to control and manage any assets in the trust for the benefit of yourself and/or a third party who you designate as the beneficiary. Since the trust owns the assets, they pass to your beneficiaries outside the probate process. However, depending on whether the trust is revocable (included) or irrevocable (excluded), the trust assets may or may not be included in your taxable estate.

A trust may be used in place of a will or in combination with one. The main difference between a will and a trust is that the assets that the trust owns avoid probate, which may or may not be desirable. A trust has less to do with the magnitude of your assets and more to do with how you want them to be managed and their distribution controlled. Generally, however, a trust is for people who hope to accomplish one or more of the following goals:

  • Avoid probate
  • Maintain privacy
  • Provide for management of assets if you become incapacitated
  • Establish specific provisions for the future distribution of assets, like the timing and amount
  • Run and support a business
  • Create charitable foundations or scholarships
  • Account for a complicated family situation
  • Create a tax-saving strategy if the individuals estate is over $5.25 million (or for spouses is over $10.5 million)

Though there are many advantages to using a trust, they are not for everyone. Ask yourself whether it is necessary to establish a trust, even a simple revocable trust, if your assets are not considerable and you are just hoping to avoid probate. Creating and making changes to trusts can be burdensome. The special tax laws concerning trusts also may make them inappropriate for certain beneficiaries. For example, depending on the characteristics of the trust, income from the trust may be taxed at a significantly escalated rate, and beneficiaries who are not in the higher income tax brackets might receive less than if the assets were given to them outright. Always contact an attorney to discuss whether a trust is the right estate planning option for your particular situation.