What is a trust?

A trust is the relationship between you, a trustee who will distribute your assets upon your death, and the beneficiaries who will receive your assets. The document establishing a trust sets out rules and instructions for the trustee, the person who manages the trust, and a list of the people you wish to give your assets to. Using a trust as part of your estate plan can help avoid litigation and can speed up the process of administering your estate. Further, if you have a significant estate, a trust can be a means of distributing your assets in a more tailored manner that does not require the oversight of the office of the commissioner of accounts. In the state of Virginia, trusts are regulated by Va. Code § 64.2 Chapter 7 The Uniform Trust Code.

Types of trusts

Trusts fall into a couple categories:

  • Revocable. A revocable trusts means the person who establishes the trust, also called the settlor, can close the trust if they wish. Most often while you are alive, you use a revocable trust to hold your assets and plan the terms of what happens upon your death.
  • Irrevocable. Once an irrevocable trust is established by the settlor, it cannot be closed or shut down by the settlor.

Revocable Living trust

A revocable living trust is the go-to trust for estate planning. It is referred to as living because it exists while you are still alive and holds many of your assets during your life. It is revocable because it can be revoked or terminated by you, the settlor of the trust (also called grantor or trustor), while you are still alive. However, upon your death, the trust becomes irrevocable, meaning it cannot be closed without following the terms as laid out by you in the trust document. This ensures your assets are distributed how you want rather than according to someone else’s desires.

In the revocable living trust, many of your assets will be held by you as the trustee of your own trust. For example, this means that you would own your investment or retirement account in your name as trustee of your trust, not in your name individually. Though it may seem like a trivial difference, the legal consequences are significant. Though trusts are taxable entities, while you are living and serving as the trustee of the trust you established as grantor, the trust will use your tax ID as grantor, avoiding any double taxation some might fear is created by holding your assets in a trust.

Upon your death, your trust will have terms describing who will become the next trustee (also called successor trustee). This person, often a family member or trusted friend, will transfer all of the assets to their name as trustee of the trust so that they can take actions to disburse your estate as indicated by the terms of your trust. By creating the revocable living trust a person can avoid the cost and hassle of probate and ensure a smoother transfer of assets to the designated beneficiaries of the trust.

Pour-over will

  • There are some assets, however, that might not be held in your name upon your death. For example, your personal belongings and potentially some bank account or vehicle that may not have been kept in your name as trustee of your trust. If you use a living revocable trust, you should always have a pour-over will that will transfer any remaining assets into your trust upon your death. The purpose of the pour-over will is to properly place any straggler assets into your trust, ensuring that you avoid the probate process and that your assets are distributed correctly.

Irrevocable trust

An irrevocable trust can be useful while you are living as a means to transfer assets or a life insurance policy to someone else. This can have positive tax consequences, but is often difficult to do correctly. Such a trust will require an attorney to carefully craft the appropriate language that accounts for all circumstances, as the settlor will not be able to change it once established. The use of an irrevocable trust should be carefully considered in collaboration with your attorney, accountant, and financial advisor to determine if the transfer of such an asset while living is the best step for you to take.