At Financial Finesse, we are often asked this very basic question.  It seems simple enough.  A trust, by its purest definition, is a form of ownership.  You can own assets in your name alone, you can own assets with someone else (e.g. jointly), you can own assets by contract (e.g. a life insurance policy), or you can own assets in a trust.  There are several benefits to having assets held in trust.  For example, when you have a trust, you can control who receives trust assets, when they receive these assets, and what these assets may be used for.  Consider the following example:

When I was a child, my father was killed in a car accident.  Prior to his death, he provided instructions in his will that basically said if anything ever happened to him, money should be set aside in a trust until each of my two brothers and I turned 18, after which the money would be used to pay for college.

In this simple example, we see the primary benefits of using a trust.  First, we see who the assets should be transferred to: my two brothers and I.  Second, we see when the assets should be transferred: when we turned 18.  Finally, we see what the assets should be used for: to pay for college.

This is an example of what is known as a testamentary trust.   A testamentary trust is a trust that is established by someone’s will after they pass away.  It is a simple but effective way for parents to control the disposition of assets to minor children.

Another form of trust is called a living trust.  A benefit of the living trust is the ability to transfer assets outside of probate.  Probate is the legal process of distributing the probated assets of a deceased person’s estate.  Because it’s a legal process—and as anyone who has ever had to go through probate will tell you—it can be an expensive, time consuming endeavor.  Also, there is a loss of privacy because probate is a matter of the public record.  There are a number of ways to avoid probate, including the use of a living trust.

A living trust may be revocable or irrevocable.  A revocable living trust allows the owner to make changes to the trust after it’s been established.  The types of changes often made include adding and removing assets, adding and removing beneficiaries, and terminating the trust.

An irrevocable living trust, as the name suggests, cannot be changed once it has been established.  They are advanced estate-planning devices typically used to remove assets from large estates.  Due to their complexity, a person should consult an estate-planning professional before considering the use of an irrevocable living trust.

Whether or not you need a trust, and which type of trust you need, depends on what your estate-planning goals happen to be.  For example, if your primary concern is to control the disposition of assets to minor children, and you are not concerned about transferring assets through probate, then consider adding language to your will so that a testamentary trust is created when you pass away.  If your primary concern is to transfer assets outside of probate, then consider creating and funding a living trust.  If you have a child with special needs, a special needs trust may be appropriate for you.  Trusts come in a variety of names depending on their purpose, but they typically share these two characteristics: they control the disposition of assets, and they generally avoid probate.

There are a number of websites that offer trust-making services, but you may also want to check with your employer to see if they offer access to legal services as an employee benefit or through an employee assistance program (EAP).