So you are not sure if setting up a trust is right for you. Many people have heard of a trust as a legal way to have some money or property managed by a person or organization for the benefit of others. They are one of the best ways to take care of your children, elderly or even yourself when you are not able to. Many people are intimidated by the idea of a trust. But by learning a little about how a trust works can make it easier to decide if you need one. Lets define a couple of terms:

What is a Trust?

A trust is a financial instrument designed to help protect the property and financial assets of individuals and families. A Trust involves multiple parties: Trustor(s), Trustee(s), and Beneficiary(ies). A strong case for setting up a Trust for an elderly parent is to avoid a potentially long and costly probate process after the trustor’s death.

What is a Trustor?

The trustor is the individual whose assets are to be gifted or transferred to another. For example, an elderly person (trustor) who may be entering an extended care facility may wish to put his/her assets into a trust in order to protect them from being used as payment for the extended care services.

What is a Trustee?
The trustee is the individual or organization responsible for carrying out the terms of the trust. The trustee must act in the best interest of the trustor and beneficiaries of the trust. Selection of a trustee should be made based on the reason the trust is set up. For example, if a trust is created for purely financial reasons (such as reducing taxes), then a trustee with strong financial and investing experience should be chosen. However, if the purpose of the trust is to distribute assets to family (for example, minor children) then a trustee that is sensitive to the needs of the beneficiaries should be chosen.

What is a Beneficiary?

The beneficiary is the person or legal entity who is designated by the trustor to receive the property and/or financial assets of the trust in the event of the trustor’s death.

Types of Trusts

There are multiple types of trusts, including revocable and irrevocable. A revocable trust can be terminated while the trustor is still alive. Upon revoking a trust, the assets are removed from the trust and returned to the original trustor. At this point the original trust is no longer considered a legal entity. An irrevocable trust legally cannot be ‘undone’ and essentially remains in effect while the trustor is still alive. Upon the trustor’s death, the trust assets are passed on to the beneficiary as specified in the trust agreement at which time the trust no longer exists as a legal entity.

Which Type of Trust Is Best For Me?

Because there are pros and cons to both revocable and irrevocable trusts, a person’s individual circumstances will largely determine the type of trust that will best suit the trustor and his/her beneficiaries. A few points to consider when determining what type of trust to create are:

Where will the trustor live and for how long does the trustor expect to live there during the lifetime of the trust?
What are the tax consequences of creating a revocable vs. an irrevocable trust?
Who will be the primary and contingent beneficiaries of the trust?
Is the primary purpose of the trust to act as a tax shelter while the trustor is still alive or to ensure the trustor’s assets are passed on to the beneficiaries upon the trustor’s death?

Before making any decisions regarding setting up a trust, speak with a legal or financial adviser to ensure you are aware of the advantages and disadvantages of setting up a trust.