Estate Planning with Trusts: Roles, Definitions, and Practical Examples

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Table 1: Types of Possible Trusts

Type of Trust	Definition	Uses
Testamentary Trust	one created under the terms of a will and only comes into effect upon the death of the testator	Created upon death subject to probate and court supervision assets in a testamentary trust are distributed according to the terms set forth in the will not operational during the testator's lifetime
Irrevocable Trust	The settlor permanently relinquishes control over the transferred assets, which cannot be adjusted or dissolved during the trustor’s lifetime	created during the settlor's lifetime  cannot be modified or revoked once established (except under limited circumstances) often used for tax planning or asset protection purposes Ex. Farmers might set up an irrevocable trust to make lifetime gifts.  Once the assets are placed in the irrevocable trust, the gift has occurred Can be used for life insurance policy
Living Trust	can be adjusted or dissolved during the trustor’s lifetime	can be either revocable or irrevocable a revocable living trust allows the settlor to retain control over the trust assets and amend or revoke the trust at any time during their lifetime Upon the trustor's death, the trust typically becomes irrevocable, and the assets are distributed according to the trust's terms.  Key Advantage of a living trust is that it avoids probate, providing a more private and efficient means of asset distribution

Trusts are legal devices useful in estate planning and require the expertise of an experienced lawyer and/or accountant. A trust is simply a legal arrangement where the owner of real or personal property, called a trustor or settlor, transfers their title to the trust. A trustee manages the property for the benefit of a third person called a beneficiary. Trusts used in estate planning include testamentary trusts, irrevocable trusts, and living trusts. A testamentary trust is one created under the terms of a will. See Md. Code Ann., Est. & Trusts § 4-412. An irrevocable trust cannot be adjusted or dissolved during the trustor’s lifetime. A living trust can be adjusted or dissolved during the trustor’s lifetime. 

What happens when you forget to include an asset in your will or trust? A pour-over will is a legal instrument used to transfer unaccounted assets to a living will or trust. A living will or trust manages your assets during your lifetime. A pour-over will direct any remaining, unaccounted-for assets at the time of your death into the trust. The will or trust must be validated through the probate process to oversee the transfer of assets. While the pour-over will itself is a public document, the details of the trust remain private, safeguarding sensitive financial information. Once transferred, the trustee can distribute these assets according to the trust's provisions. The pour-over will only serve as a safety net; it is best to strive to account for all assets.

Farmers might set up an irrevocable trust to make lifetime gifts. Once the assets are placed in the irrevocable trust, the gift has occurred.  Any appreciation of the farmland after that point will not be included as part of the estate upon death. However, by giving such a large gift, you may have gift tax consequences. If these trusts occur within certain time periods prior to the death, they may be included in the estate as “gifts in contemplation of death.” People can use an irrevocable trust for their life insurance policy, as mentioned below.

A will determines how property is distributed after death, but it does not avoid the probate process. When you die, someone must file your will with the registrar of wills, and a probate estate is opened. In this sometimes lengthy process, the court ensures that all debts are paid from the estate's proceeds and then approves the distribution of the remaining property to the beneficiaries specified in the will. All information about this process becomes publicly available. If you create a living trust, you can avoid the probate procedure for those assets titled in the trust.

Let’s say you set up a trust over which you are the trustee. You place all or part of your property into the ownership of the trust. As the trustee, you continue to have ownership rights over the trust and can manage the property as you wish, but must designate a successor trustee to follow you. You continue to be the beneficiary of the income stream from the property in the trust. These trusts can also be revoked. The trust can be drafted so that the successor trustee has the right to take over when the original trustee suffers from dementia or other debilitating conditions. This may help as one ages and is not capable of managing one’s personal affairs. The trade-offs associated with a trust versus probate are the cost of setting up and maintaining the trust compared to public disclosure under probate court, probate costs, and possibly the amount of time taken to settle the estate.  Use of a trust does not reduce the size of the taxable estate, nor the estate tax burden. 

For example, if Bob and Mary have one child who will inherit the farm upon their deaths, they may consider using a living trust or two living trusts to effectively transfer their property to their child upon their deaths. Their child will be able to continue to operate the business and take control and/or ownership of the assets immediately. Information about their estate will not be publicly available either.

There are many other types of trusts which may work for your particular situation and can be investigated with your attorney and/or professional advisor. These include charitable remainder trusts, grantor-retained annuity trusts, grantor-retained unitrusts, qualified personal residence trusts, qualified terminable interest property trusts (to equalize the estates of each spouse), and supplemental/special need trusts.

Table 2: Roles in the Formation of a Trust

Role	Duties
Settlor or Trustor	creates the trust by transferring property to the trust defines the terms of the trust, including its purpose, beneficiaries, and provisions for administration Gives up legal and equitable title to the Trustee and Beneficiary
Trustee	individual or entity responsible for managing the trust property in accordance with the terms of the trust and applicable law Holds legal title
Beneficiary	the person or entity for whose benefit the trust is created Holds equitable title

Glossary

Beneficiary - The person or entity for whose benefit the trust is created. Holds equitable title to the trust property.

Irrevocable Trust - A trust in which the settlor permanently relinquishes control over the transferred assets. It cannot be modified or revoked once established (except in limited circumstances). Commonly used for tax planning or asset protection.

Living Trust - A trust created during the settlor’s lifetime that can be adjusted or dissolved. May be either revocable or irrevocable. 

Pour-over Will - a legal instrument used to ensure that any assets not already included in a living trust or will during an individual's lifetime are transferred into the trust upon death

Probate - The legal process through which a will is validated and an estate is settled. It involves court supervision, debt payment, and public disclosure of estate details.

Settlor / Trustor - The individual who creates the trust by transferring property into it. They define the terms of the trust and relinquish both legal and equitable title to the trustee and beneficiary.

Testamentary Trust - A trust created under the terms of a will, becoming effective only upon the death of the testator. Subject to probate and court supervision.

Trust - A legal arrangement in which a trustor transfers property to a trustee, who manages it for the benefit of a beneficiary.

Trustee - The individual or entity that manages the trust property. Holds legal title and acts in accordance with the terms of the trust and applicable law.

This work is supported by the Northeast Extension Risk Management project award no. 2024-70027-42540, from the U.S. Department of Agriculture’s National Institute of Food and Agriculture.