What is a Trust and How does it Work?
For many people, Trusts are an integral component of their Estate Plan. As part of your conversation with your Estate Planning attorney, it is important to have a working knowledge of what a Trust is, the various roles and actors involved in a Trust, and how a Trust can benefit your Estate Plan.
In a nutshell, a Trust is a way to own property or assets. A Trust Agreement is a set of instructions as to how the Trustmaker or Grantor wants the assets to be control and governed. All Trusts have three main players: The Trustmaker/Grantor, the Trustee, and the Beneficiary. The Trustmaker is the person who creates the Trust and whose assets are used to fund the Trust. Depending on the nature of the Trust, the Trustmaker is the only person who is able to make changes to the Trust Agreement instructions or terminate the Trust in its entirety. Once the Trustmaker dies or becomes incapacitated, the Trustmaker can no longer make changes or terminate the Trust Agreement.
The Trustee is the person who controls the assets owned by the Trust. The Trustee makes decisions about buying or selling or changing the nature of assets held by the Trust. For example, the Trustee has the authority to liquidate a bond and purchase a certificate of deposit with the funds. If real estate was owned by the Trust, the Trustee can make the determination of if/when to sell the property and how the assets should be invested or held. The Trustee also makes distributions from the Trust to the beneficiaries. Often, the Trustee and Trustmaker are the same person, but not in all circumstances. The Trustee has a fiduciary responsibility to hold and manage the Trust assets based on the Trustmaker's instructions.
The Beneficiary is the person who gets the benefit of the assets held in the Trust. The Beneficiary during the Trustmaker's life may not the same person after the Trustmaker's death. The Trustee manages the assets and makes distributions to the benefit of the beneficiary. The Trustmaker, as part of the Trust instructions, may include specific language dictating how the beneficiary is entitled to income and principal distributions, and whether those distributions should be made by the Trustee to the beneficiary outright or held in a subtrust for the beneficiary's benefit.
An alternative to owning property in Trust, would be for an individual to own property in his or her own name (for example: a checking account held by Jane Doe or a house owned by John Doe). When an individual owns property in his or her own name, upon his or her death, that property may be subject to the Probate process in Illinois. The Probate process occurs when a Judge determines who owns and controls an individual's assets after that individual passes away. If the deceased person made a Last Will and Testament, the Judge uses that document to determine who should get the deceased person's assets. If not, the Judge uses the law of Illinois found in the Probate Code in order to make that determination. Ultimately, when an individual owns assets in his or her own name, when that person passes away, the assets may need to be distributed through the Probate process.
If a Trust, rather than an individual in his or her own name, owns the assets then the assets do not need to go through the Probate process. This is because the Trust is a nonliving entity and cannot pass away like an individual. A Trust owns property when the Trustmaker or Grantor transfers the property from themselves as an individual to the Trust. Property does not become owned by the Trust until the ownership of the asset is legally changed to the name of the Trust. Merely listing the assets to be held in the Trust in the body of the document does not legally change the ownership of the asset. Once the asset is owned by the Trust, it become subject to the control of the Trustee and the rules governing the distribution of the Trust to the beneficiaries.Back To Articles