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Understanding the use and misuse of trusts

On Behalf of | Jan 11, 2021 | Trusts |

One of the most misunderstood legal terms is “trust.” Most Connecticut residents have heard the term, but many have no understanding of the nature and operation of a trust. The subject of trusts is far too broad for a single (or even several) blog posts. This post will discuss the general concept of a trust, provide a few indications of different kinds of trusts and sketch out the benefits and disadvantages of using a trust as an estate planning tool.

What is a trust?

A trust is a legal entity that has the authority to hold and convey assets, invest trust assets, and distribute trust assets according to the directions of the person whose assets provided initial funding for the trust. A trust is created by a person known as the settlor or trustor. The settlor creates a trust by signing a proper document that complies with the trust laws of the state of Connecticut (or any other state where the trust will  be located) and then donating assets to the trust. The trust is managed by a third party called a trustee. The trustee has a legal obligation, known as a “fiduciary duty,” to manage and distribute the assets of the trust in accordance with the settlor’s instructions.

Why are trusts created?

Trusts are created for a variety of purposes. Some trusts are intended to keep a child’s assets out of the hands of creditors. Other trusts are used to transfer assets to the settlor’s spouse and thereby minimize state and federal taxes. Some trusts are used to set aside assets that can be used to pay the living and other expenses of a disabled person. Other trusts are used to fund one or more charitable ventures that the settlor wants to support.

How are trusts created?

A trust is created when the person who is contributing assets to the trusts signs a document, called the trust instrument, and executes documents necessary to transfer assets to a trust. Some trust instruments can be very complicated and should be drafted only by a lawyer who has great experience in creating trusts. Anyone who is interested in creating a trust should speak to a capable trust attorney who can evaluate the situation and draft a trust instrument that will satisfy state and federal law and carry out the settlor’s intent.