In general, a trust is a legal relationship, represented by a legal document, in which one person (or qualified trust company), the trustee, holds property for the benefit of another, the beneficiary. The property can be any kind of real or personal property – money, real estate, stocks, bonds, collections, business interests, personal possessions, and automobiles. One person may establish a trust to benefit himself or another person.
A trust generally involves at least two and often more people: the grantor, who creates the trust and is also known as the settler or donor; the trustee, who holds and manages the property for the benefit of the grantor and beneficiaries; and one or more beneficiaries who benefit from the trust. In some states, you can name yourself as trustee, so that you are able to control the trust’s assets. However, if you are the trustee, the IRS requires you to report any trust income on your personal tax return. After your death, your trust is passed on to the successor trustee you named in your original trust. The successor trustee will be responsible for taking care of the assets and passing them on to your beneficiaries.
The most common reason for people to make a trust is to keep their property from going through probate when they die. Unlike a will, which goes into effect when you die, your properties are transferred to certain types of trusts while you are still alive and the trusts continue to hold the properties after your death. Although you no longer own the assets, because your trust does, you still have access to the assets during your lifetime. You instruct your trust to pay income to you, and, on your death, your trustee (or successor trustee, if you were the original trustee) is instructed to divide whatever is left to your beneficiaries, according to your instructions. No probate is required with a trust.