What is a Trust?
A trust is a kind of legal arrangement. It is technically a contract between you and whoever is the trustee. It is virtually a separate legal entity like a corporation.
The property assigned to the trust is owned by the trustee in their legal capacity as trustee. Nothing is actually “owned by the trust,” in the way things can be owned by a corporation or other legal entity. But, federal law treats the trust as a separate entity. The trust may have to have its own tax ID number and file its own tax returns, so for all practical purposes, it acts like a separate legal entity.
How Does a Trust Work?
Think of a trust as if it were a box you can put stuff in. When you set up a trust and put stuff in the box, you are called a settlor. The stuff in the box is going to be used to benefit somebody. That person is called, conveniently, the beneficiary. The box has a set of rules on it detailing how and when things can come out of the box to benefit the beneficiary. The person who is responsible for holding the box and following those rules is called the trustee. In a Louisiana trust, the trustee is technically the owner of the items of the trust.
The Testamentary Trust and the Inter Vivos Trust
Louisiana Law divides trusts into two broad categories. First, is the testamentary trust. This is a trust created in a will. It doesn’t exist until you pass away and the will is executed. The second is the inter vivos trust. “Inter vivos” means “while alive.” It’s a trust that is created during your life. It is the way we say “living trust” in Louisiana.
Revocable Trusts and Irrevocable Trusts
Another important way trusts are classified is as revocable or irrevocable. A revocable trust can be dissolved or modified at any time by the settlor. An irrevocable trust cannot. An irrevocable trust is like a locked box. The settlor can’t get the stuff back out of the box. The benefit (under most circumstances) is that, because the box is locked like this, things in an irrevocable trust can’t be raided by creditors, either.
In a Trust, You Can Wear Multiple “Hats”
So far, I’ve talked about the settlor, trustee, and beneficiary as if there were single, separate individuals, but this does not have to be the case. You can have multiple settlors, such as when you and your spouse create a trust together. You can have co-trustees, and you can have many many beneficiaries.
You can also have one person filling more than one role. For example, one person could be all three: settlor, trustee, and beneficiary. This is normal in a revocable living trust. The trust will name successor trustees and beneficiaries, which is how it transfers assets after death while avoiding probate. The trust states that the heirs become new trustees and beneficiaries after death. This kind of trust can be used in many creative ways and is the centerpiece of several of our estate plans.