WHAT IS A TRUST?
A Trust is a contract. It is an agreement between the person(s) who create and fund the Trust (called Grantors or Settlors or Trustors), the person who will manage the Trust assets–Trustee, and the person(s) who get the use of the Trust assets-beneficiaries.
Usually my clients occupy all three roles-at least to start. As long as my client remains mentally competent and alive he or she or they get to continue being Trustee. Once the Trustee is no longer able to manage the assets the Co-Trustee or a successor trustee takes over the management of the assets avoiding the necessity of a guardianship or probate proceeding as least as concerns the assets in the Trust. This benefit is only good for the assets placed into the Trust. Some assets cannot be placed into a trust, such as a 401k plan.
I cannot stress enough the great benefit of placing your assets into a trust to avoid Guardianship if you have persons who can be trusted to manage the assets for your benefit. Guardianship are the expensive, slow, and extremely limiting court process most people accuse probate of being and it is imposed while you are still alive. I have an entire section of this website discussing Guardianship. Guardianship can be avoided and should be.
The Trustee is responsible for managing the assets and income for the benefit of the beneficiaries. This is a fiduciary position. I discuss fiduciary responsibilities, here.
A trust created while a person is alive is called a living trust, or inter vivos to use the fancy legal Latin term. A trust created while a person is alive is usually also revocable or able to be modified without going to court. Living Trusts and Revocable Trusts are for most purposes the same thing.
An irrevocable trust is not able to be changed or modified without going through a court proceeding and maybe not then. A Testamentary trust is a trust created by means of a person’s will and becomes effective only after a person dies. Clearly these trusts are irrevocable. For a gift to be final for income or estate tax purposes it must be irrevocable. This is probably the most common reason for the creation of irrevocable trusts.
A self-funded trust is not an effective means of asset protection. A third-party trust is avery effective asset protection tool. A gift by a parent or grand-parent into a trust using spend thrift protection language can protect against almost any disaster except investment or market disasters: lawsuits, beneficiaries cannot mismanage assets or income still in trust.