- All trusts share a few common legalities. Every trust is a legal relationship involving a trustor (you, the person making the trust), a trustee (somebody you appoint to manage the trust property and make disbursements from the trust) and one or more beneficiaries (people you want to receive trust income or disbursements).
- A revocable trust is one where you retain complete control over the trust, including the power to end the trust any time you want. With a revocable trust, you can wake up one morning and decide the trust should end, and that is that. You don't need anybody's permission to terminate the trust. A revocable trust is the most commonly used type of trust.
- An irrevocable trust is a trust where you give up the right to unilaterally terminate the trust. To terminate an irrevocable trust, you have to get either (a) the consent of the trustee and all of the beneficiaries, or (b) a court order terminating the trust. The advantage of an irrevocable trust, however, is that it can provide tax savings. For example, if you own a piece of rental property that earns $200,000 per year in rents, and you personally fall in the 40% income tax bracket, you will pay $80,000 of tax each year. But if you transfer the property to a trust that falls in a lower tax bracket, like 33%, then the trust will only pay $66,667 per year in taxes.
- A family trust is one where the trustor and all of the beneficiaries are members of the same family. Legally, there is nothing significant about creating a family trust compared to another type of living trust, but as a practical matter, the family trust is a great vehicle for sharing property with family and especially for transferring property to family when you die. When property is held in trust, it does not have to go through probate. Probate is the complicated, time-consuming and expensive process that occurs when you die and a court distributes property according to the terms of your will, or if you have no will, according to state law.
- Many living trusts are drafted to work with your will. Some property may be held in trust, and other property remains in your individual possession and therefore goes through probate according to your will. Often, your will simply provides that all of your property should go into your trust (in other words, the will simply "pours over" all of your property to the trust).
