One powerful tool you may want to consider when creating an estate plan is a trust. This type of financial instrument forms a fiduciary relationship between one party, referred to as the trustor and another party, the trustee. The trustor tasks the trustee with the responsibility of holding title to property and assets for the benefit of a third party, the beneficiary. Ultimately a trust is designed to efficiently distribute assets in the manner desired by the trustor. 

Types of trusts 

There are several different types of trusts, each with its own advantages and disadvantages. The type of trust you choose will depend upon your overall estate planning strategy and specific circumstances. The types of trusts available to choose from are as follows: living, funded, unfunded, revocable and irrevocable. 

A living trust will hold the assets for the benefit of the trustor during his or her lifetime and then will transfer the assets to the chosen beneficiaries upon the death of the trustor. Revocable trusts can be changed by the trustor while irrevocable trusts cannot be altered once established. Note that living trusts can be either revocable or irrevocable. 

With a funded trust the trustor will put assets into the trust during the trustor’s lifetime. Alternatively, an unfunded trust is simply a legal agreement with no assets put into the trust while the trustor is alive. The trust may be funded upon the trustor’s death or it may not, depending upon how the trust was designed. 

Avoid probate 

One of the main goals of estate planning is to avoid the expensive probate process in the courts. Trusts are many times preferred over wills because wills are required to go through the probate court system which can be costly and cumbersome. This can be particularly true if the will is challenged by another party for some reason. 

Tax benefits 

Another common reason people choose to use a trust is for tax planning purposes. The transfer of assets from a trust to the beneficiary will not trigger a capital gains tax liability. However, when a beneficiary decides to sell an asset for more than what the trustor purchased the asset for, the beneficiary would be responsible for capital gains tax liability based upon the market value of when the trust transferred the asset to the beneficiary, not the value the trustor purchased the asset for.  Thus, the beneficiary would be able to avoid unnecessary costs of capital gains tax on the inherited estate. 

Should I establish a trust? 

Establishing a trust can spare your heirs significant hassle and can save them money by shielding your estate from tax liabilities. However, whether or not you should establish a trust as part of your estate plan will depend on your specific circumstances and intentions. Also, choosing the type of trust and crafting the details of the trust can be complicated. Therefore, it is a good idea to consult with a financial advisor to ensure you make informed estate planning decisions.


While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters.  You should discuss tax or legal matters with the appropriate professional.