Trusts

What Is a Trust?

A trust is one of the most flexible and powerful tools in estate planning. Whether your goal is to avoid probate, protect assets for your children, reduce estate taxes, plan for incapacity, or provide for a loved one with special needs, there is a trust designed to accomplish it. Understanding how trusts work and which type serves your family's needs is the foundation of a sound estate plan.

A trust is a legal arrangement in which one party, known as the grantor, settlor, or trustor, transfers ownership of assets to another party, known as the trustee, to hold and manage for the benefit of a third party, the beneficiary or beneficiaries. At its core, a trust is a legal relationship governed by a written agreement that specifies exactly how the trustee must manage and distribute the trust assets.

The property held in a trust can include virtually any type of asset: cash, real estate, stocks and bonds, business interests, personal property, automobiles, and collections. The trust itself holds legal title to those assets. The trustee has a fiduciary duty to manage them responsibly, in strict accordance with the trust's terms and in the best interests of the beneficiaries. The beneficiaries, in turn, hold what is called equitable title, meaning the right to benefit from the trust's assets in the manner the trust specifies.

The Three Parties to Every Trust

•      Grantor (also called Settlor, Trustor, or Donor): The person who creates the trust, establishes its terms, and transfers assets into it. The grantor determines who benefits, when distributions are made, and what conditions govern those distributions.

•      Trustee: The person or institution responsible for holding, managing, and distributing trust assets in accordance with the trust's terms and the law. The trustee owes a fiduciary duty to the beneficiaries and must act prudently and loyally at all times.

•      Beneficiary or Beneficiaries: The person or persons, or organizations, entitled to benefit from the trust. Beneficiaries may receive income generated by the trust assets, distributions of principal, or other specified benefits according to the trust's terms.

In most revocable living trusts, the grantor serves as both the initial trustee and the initial beneficiary. In that capacity, the grantor retains all of the same practical control over trust assets that they had when those assets were held in their own name. They can buy assets and add them to the trust, sell assets out of the trust, and distribute trust property as they see fit, all without restriction. A successor trustee steps in only when the grantor becomes incapacitated or dies.

Transferring assets into a trust does not mean giving them away. In a revocable living trust, you remain in full control of your assets during your lifetime. The trust simply changes how those assets are owned and how they will be managed and distributed in the future.

Trusts fall into two broad categories based on when they are created and when they take effect.

•      Living Trust (Inter Vivos Trust): A living trust is created during the grantor's lifetime. It can be revocable, meaning the grantor retains the ability to modify or revoke it at any time, or irrevocable, meaning its terms are fixed once established. Living trusts are used for a wide range of purposes including asset management, incapacity planning, probate avoidance, and estate tax reduction.

•      Testamentary Trust: A testamentary trust is established through the grantor's will and comes into effect at the grantor's death. Unlike a living trust, a testamentary trust does not avoid probate; its terms are carried out through the probate process. Testamentary trusts are commonly used for the financial management of assets left to minor children, for asset protection trusts for adult beneficiaries, and for charitable purposes.

Will and Trust Planning prepares trusts for a wide range of estate planning purposes. The following represents our core trust practice areas. Each trust type is designed to accomplish specific goals, and many estate plans incorporate more than one.

Foundation Trusts

•      Revocable Living Trust: The cornerstone of most comprehensive estate plans. Avoids probate, provides incapacity planning, and allows for detailed, private distribution of assets at death. The grantor retains full control during their lifetime.

•      Irrevocable Living Trust: A trust whose terms cannot be changed once established. Used for asset protection, estate tax planning, and Medicaid planning. Assets transferred into an irrevocable trust are generally outside the grantor's taxable estate and protected from their personal creditors.

•      Testamentary Trust: Created through the grantor's will, takes effect at death, and passes through probate. Used for managing assets for minor children, protecting beneficiaries from their own financial decisions, and directing assets to specific purposes after death.

Asset Protection Trusts

•      Spendthrift Trust: Protects trust assets from being squandered by a beneficiary or seized by their creditors. The trustee controls distributions rather than the beneficiary, safeguarding the assets for the beneficiary's long-term financial wellbeing.

•      Third-Party Spendthrift Trust: Established by a grantor for the benefit of another person, with spendthrift provisions preventing the beneficiary from assigning their interest and preventing creditors from reaching trust assets before distribution. Can be a stand-alone trust or built into a broader estate plan.

•      Discretionary Trust: Grants the trustee broad discretion to determine when and how much to distribute to each beneficiary. Unlike a support trust, there is no mandatory distribution obligation; the trustee exercises judgment based on the beneficiaries' circumstances and needs.

•      Support Trust: Directs the trustee to make distributions for specific needs of the beneficiaries, such as health, education, maintenance, and support. Unlike a discretionary trust, the trustee has a duty to distribute when the specified needs arise.

•      Sprinkle Trust: Contains a sprinkling or spray provision that grants the trustee discretion to distribute trust income or principal among multiple beneficiaries in varying amounts based on their individual needs and circumstances, rather than in fixed shares.

Family and Legacy Trusts

•      Legacy Trust: Designed to preserve wealth and values across multiple generations. A legacy trust typically spans more than one generation and is structured to manage and distribute assets for the long-term benefit of the grantor's family or chosen beneficiaries.

•      Special Needs Trust (Supplemental Needs Trust): Holds assets for a beneficiary with disabilities without disqualifying them from Medicaid or Supplemental Security Income. The trustee funds supplemental needs beyond what government programs provide, preserving both the benefits and the quality of life.

•      Pet Trust: Allows a pet owner to set aside funds for the care and maintenance of their animals in the event of the owner's incapacity or death. A named trustee manages the funds and ensures that the pet receives the care the grantor intended.

•      Substance Abuse Trust: Manages assets for the benefit of a beneficiary who struggles with addiction. The trustee holds full discretionary authority over distributions, may require drug and alcohol testing, and can condition distributions on enrollment in and completion of a rehabilitation program.

Estate Tax Planning Trusts

•      Credit Shelter Trust (Bypass Trust or A/B Trust): The cornerstone of estate tax planning for married couples in Vermont. Directs an amount up to the applicable exemption into a trust at the first spouse's death, using that spouse's exemption rather than wasting it. The trust assets pass to children or other beneficiaries at the second death completely free of Vermont and federal estate tax.

•      Qualified Terminable Interest Property Trust (QTIP Trust): Provides income to the surviving spouse during their lifetime while ensuring that the trust principal passes to the deceased spouse's chosen beneficiaries at the survivor's death. When drafted correctly, a QTIP Trust can generate substantial estate tax savings for married couples with complex family structures.

•      Irrevocable Life Insurance Trust (ILIT): Holds a life insurance policy outside the grantor's taxable estate. The ILIT owns the policy and receives the proceeds at the grantor's death, providing tax-free liquidity to pay estate taxes, fund buy-sell agreements, or provide for family members.

•      Spousal Limited Access Trust (SLAT): Allows one spouse to transfer assets irrevocably out of both spouses' taxable estates while the beneficiary spouse retains some indirect access to the funds. Commonly used to take advantage of estate tax exemptions before they change.

•      Intentionally Defective Grantor Trust (IDGT): Removes assets from the grantor's taxable estate for estate tax purposes while the grantor continues to pay income tax on trust earnings, effectively making additional tax-free transfers to beneficiaries over time.

•      Qualified Personal Residence Trust (QPRT): Transfers a home or vacation property out of the grantor's taxable estate at a reduced gift tax cost while the grantor retains the right to live there for a defined term. All post-transfer appreciation escapes estate tax.

•      Grantor Retained Annuity Trust (GRAT): Transfers appreciating assets out of the grantor's taxable estate without using the federal gift tax exemption. The grantor retains an annuity for a defined term; growth above the IRS hurdle rate passes to beneficiaries free of gift and estate tax.

•      Generation-Skipping Transfer Trust (GST Trust): Designed to minimize or avoid the generation-skipping transfer tax, which applies when assets pass directly to grandchildren or more remote descendants. A GST trust allows wealth to benefit multiple generations while limiting transfer tax exposure at each level.

Charitable Trusts

•      Charitable Remainder Trust (CRT): A tax-exempt irrevocable trust that provides income to the grantor or other designated beneficiaries for a specified period, with the remaining assets passing to one or more charitable organizations at the end of the term. Generates income tax deductions and can reduce or eliminate capital gains tax on appreciated assets.

•      Charitable Lead Trust (CLT): An irrevocable trust that provides income to one or more charitable organizations for a specified period, with the remaining assets passing to non-charitable beneficiaries, such as children or grandchildren, at the end of the term. Used to transfer wealth to heirs at reduced gift and estate tax cost.

Medicaid and Long-Term Care Planning Trusts

•      Medicaid Qualifying Trust: An irrevocable trust used to protect assets from Medicaid spend-down requirements and the cost of long-term care. When properly structured, the principal of a Medicaid qualifying trust is protected from being counted toward Medicaid eligibility, allowing the grantor to qualify for benefits while preserving assets for their family.

Trusts offer a range of benefits that a will alone cannot provide. The right trust, or combination of trusts, can accomplish goals that would otherwise require costly court proceedings, expose your estate to unnecessary taxes, or leave your beneficiaries without adequate protection.

•      Probate avoidance: Assets held in a revocable living trust pass to beneficiaries at death without any probate proceeding, privately and without court involvement, saving time, money, and public exposure.

•      Incapacity planning: A revocable living trust provides for seamless management of your assets if you become incapacitated, with your successor trustee stepping in immediately under the trust's terms without any court intervention.

•      Asset management: A trust provides a professional framework for managing assets during the grantor's lifetime, including investment oversight and the ability to use assets as needed.

•      Asset protection: Assets in an irrevocable trust are generally shielded from the grantor's creditors and, depending on the trust's structure, from the beneficiaries' creditors as well.

•      Estate tax planning: Properly structured trusts are among the most effective tools for reducing or eliminating Vermont and federal estate taxes, preserving more of your estate for the people and causes you care about.

•      Medicaid planning: Irrevocable trusts can be used to protect assets from Medicaid spend-down while allowing the grantor to qualify for long-term care benefits, preserving the family's home and savings.

•      Privacy: Unlike probate proceedings, which are matters of public record, trust administration occurs privately, without court involvement or public disclosure of assets, beneficiaries, or distribution amounts.

•      Substance abuse protection: A substance abuse trust protects a beneficiary's inheritance from being used to fuel an addiction while still providing support for housing, healthcare, rehabilitation, and other legitimate needs.

•      Business succession planning: Trusts are frequently used to ensure continuity of family-owned businesses at the owner's death, minimizing disruption and providing a clear succession framework for the next generation.

•      Charitable giving: Charitable trusts allow you to support the organizations and causes that matter most to you while generating income, tax benefits, and a lasting legacy.

What is the difference between a revocable and an irrevocable trust?

A revocable trust can be modified, amended, or revoked at any time during the grantor's lifetime as long as the grantor has legal capacity. The grantor retains full control over the assets. An irrevocable trust, once established, generally cannot be changed without the consent of all beneficiaries. Assets transferred into an irrevocable trust are removed from the grantor's estate and are no longer subject to the grantor's personal creditors. The trade-off for that protection and tax benefit is the permanent surrender of control.

Does a trust avoid probate?

A revocable living trust avoids probate for all assets properly transferred into it during the grantor's lifetime. A testamentary trust, created through a will, does not avoid probate; it takes effect through the probate process. The key to probate avoidance is funding the trust, meaning retitling assets into the trust's name during the grantor's lifetime. An unfunded or partially funded trust only avoids probate for the assets actually transferred into it.

Do I need both a will and a trust?

For most families with a revocable living trust, yes. A will remains essential even with a trust. A pour-over will captures any assets not transferred into the trust during your lifetime and directs them into the trust at your death. The will is also the only document in which you can nominate a guardian for your minor children. Most trust-centered estate plans include both a trust and a will working together.

Can I be my own trustee?

Yes. In a revocable living trust, the grantor typically serves as the initial trustee and retains full control over trust assets during their lifetime. You name a successor trustee, who steps in at your incapacity or death to manage and distribute assets according to the trust's terms. Serving as your own trustee does not reduce the trust's probate avoidance benefits or its incapacity planning function.

How is a trust different from a will?

A will takes effect only at death and requires all probate assets to pass through the public court process before reaching beneficiaries. A revocable living trust takes effect immediately upon signing, holds assets during your lifetime, and distributes them at your death without probate, privately and on your timeline. A trust can also address incapacity during your lifetime, provide detailed conditions on distributions, and protect beneficiaries in ways a will cannot accomplish.

Are trust assets protected from creditors?

It depends on the type of trust. Assets in a revocable living trust are not protected from the grantor's personal creditors during the grantor's lifetime, because the grantor retains control and can revoke the trust. Assets in an irrevocable trust are generally outside the grantor's reach and therefore protected from their personal creditors. A properly structured spendthrift trust can also protect beneficiaries' interests from their own creditors.

What types of assets can be held in a trust?

Virtually any type of asset can be transferred into a trust, including real estate, bank and investment accounts, business interests, life insurance policies, vehicles, personal property, and collections. The process of transferring assets into a trust is called funding, and it typically involves retitling assets into the trust's name, updating beneficiary designations, and in some cases executing deeds or assignment documents. A trust that is not properly funded provides limited protection.

How do I know which type of trust is right for my family?

The right trust structure depends on your assets, your family's circumstances, your goals, and your concerns. A revocable living trust is the foundation of most comprehensive estate plans. Beyond that, the need for estate tax planning trusts, asset protection trusts, special needs trusts, or charitable trusts depends on your specific situation. We will assess your circumstances in your Peace of Mind Planning Session and recommend the combination of trust structures that serves your family's real needs.

At Will and Trust Planning, we prepare trusts for a wide range of purposes and family circumstances. Before we draft a single document, we sit down with you in a Peace of Mind Planning Session to understand what you own, who you want to protect, and what you want to accomplish. We explain your options in plain language and build a plan that fits your real situation rather than a generic template.

Whether you need a straightforward revocable living trust, a comprehensive estate tax plan involving multiple trust structures, or a specialized trust for a loved one with unique needs, we are here to help you make the right decisions with confidence.

Contact Will and Trust Planning Today

For personalized advice on estate planning, including strategies to minimize or avoid probate, contact Will and Trust Planning today. Our experienced estate planning attorneys can help you understand your options, draft essential documents, and create a plan that protects your assets and achieves your goals.