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Trusts: A Tool for Protecting and Managing Assets

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A trust is a legal entity that holds assets for the benefit of a person (either you or someone else) or an organization. It functions like a container, holding money or property under a different legal definition than if you held it on your own.

Every trust arrangement involves three key parties:

  • The grantor, who creates and funds the trust.
  • The beneficiary, who receives benefits such as income or property from the trust. This can be the grantor or individuals named by the grantor.
  • The trustee, who holds legal title to trust property, administers the trust and must act in the best interests of the beneficiary. The grantor may be one of the trustees, but the trust must also have at least one disinterested trustee.

Trusts are established through a legal document called a trust agreement. This document names the trustees and beneficiaries and outlines how assets will be managed and distributed. The trust agreement also states when the trust will end.

Trusts can hold a variety of assets, including cash, stocks, bonds, real estate, life insurance policies, and valuable personal property.

Trusts fall into two main categories:

  • Revocable trusts, also known as living trusts, allow the grantor to maintain control over the assets and make changes at any time. These trusts can help avoid probate and provide for incapacity, but do not offer creditor protection or tax benefits.
  • Irrevocable trusts are typically used to benefit others, such as children or grandchildren. Once created, the terms in the trust agreement generally cannot be altered. These trusts can provide tax advantages and asset protection and may be structured to last for multiple generations.

Potential advantages and disadvantages of trusts

Some key benefits of establishing a trust include:

  • Reducing estate taxes.
  • Shielding assets from creditors.
  • Avoiding the costs and delays of probate.
  • Preserving assets for minor children until they reach adulthood.
  • Allowing professional management of investments.
  • Providing financial support in case of incapacity.
  • Shifting tax burdens to beneficiaries in lower tax brackets.
  • Supporting charitable giving.
  • Keeping wealth private (trust holdings are not part of the public record).

However, trusts also have potential drawbacks:

  • Costs for setup and ongoing administration, including trustee and legal fees.
  • Possible loss of control over assets.
  • Time-consuming compliance with legal and reporting requirements.
  • Higher tax rates on income retained by the trust rather than distributed to beneficiaries.

If you are a beneficiary, be sure you receive a copy of the trust agreement and review any account or investment statements. If you are establishing a trust, an attorney can help structure it to distribute specific assets such as cash, real estate, or investments. In cases where a child is the beneficiary, you may consider appointing a family member as trustee. However, because trust management can be complicated — especially when government benefit eligibility is a factor — you may opt for a professional trustee in addition to or instead of a family member.

You should always consult an attorney and a tax adviser to determine the best structure for your estate planning needs. If you are located in the Sonoma County, CA area and are ready to set up your plan, give our office a call at 707-769-9975 or contact us by email.

Bridget Mackay
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