Understanding a Living Trust
tienne • September 29, 2022
You may have heard that you should get a revocable living trust. But what is that? Frequently people talk about trusts as though they are thing, like a box, that you can put assets into. You may have heard, for example, that you should put your house into a trust. But a trust is not a thing. It’s a relationship. There are three people involved:
Although each of these roles is legally distinct from the others, one person can fill multiple roles. Or multiple people can fill one role. In fact, when you set up a revocable living trust, you initially fill all three roles. It is also common for people to set up trusts that name their children as the trust’s beneficiaries, and for one of those children to also become the trustee after the trustmaker has passed away.
- The person making the trust. There are several different terms to describe this person: the “
grantor
,” the “
settlor
,” the “
trustor
,” or the “
trustmaker
.” Each of these terms describe the same thing – a person who owns property and wants to control how that property will be managed if they can’t do it themselves, either because they have become incapacitated or because they have died. This person writes their instructions down in a “trust agreement.” Then they hand the property they want controlled by those instructions and the instructions to the second person in this relationship.
- The person managing the trust. The person put in charge of managing the trust is the “
trustee
.” The trustee’s job is to follow the instructions given to them by the person who created the trust. If the trustmaker told the trustee to give the trustmaker’s kid all the assets in the trust when that kid turns 21, the trustee has to do it, even if he thinks that doing so is a terrible idea. The trustee is a fiduciary for the beneficiaries of the trust, meaning that he or she has to proactively manage the trust assets in the best interest of the people who are ultimately to receive those assets. The trustee has a duty of loyalty to all trust beneficiaries, meaning that he must put their interests ahead of his own. He cannot, for example, use their money in a way that will benefit him. He also has a duty to treat all the beneficiaries equally. He can’t manage the trust in a way that benefits one beneficiary at the expense of another.
- The person entitled to receive something from the trust. A person who is entitled to receive anything from a trust is called a “ beneficiary .” This could be one particular item, or it could be everything in the trust. It could be an income stream for a certain period of time, or it could be the amount left over after income has been paid to someone else for a period of time. It could be an outright distribution, with no restrictions, or it could be held under the ongoing supervision of a trustee who gets to decide if and when the beneficiary receives assets. As long as the trustmaker’s instructions don’t violate public policy (requiring a beneficiary to divorce his spouse, for example, before he can get anything from the trust), the trustmaker has wide latitude to decide what restrictions to put on the distribution of trust assets to a beneficiary.
Although each of these roles is legally distinct from the others, one person can fill multiple roles. Or multiple people can fill one role. In fact, when you set up a revocable living trust, you initially fill all three roles. It is also common for people to set up trusts that name their children as the trust’s beneficiaries, and for one of those children to also become the trustee after the trustmaker has passed away.
why would you set up a trust?
So, why would you do this? Because a trust allows you to separate ownership of your assets from control over the assets, and doing that creates all kind of opportunities that you don’t have if your assets are simply titled in your name. The primary reason people set up revocable living trusts is so that their assets can be managed for themselves and their beneficiaries without court involvement. If all your assets are titled to you, and you suddenly can’t do things like write checks, file tax returns, sign real estate closing documents, or make investment decisions, somebody (usually a family member) has to get authorization from a court do those things for you.
If, however, you were holding your assets as trustee of your trust, the person you named to be your “successor trustee” in your trust agreement simply steps in and starts managing the trust assets the moment you can’t do it. No court authorization would be needed because, on paper, those assets weren’t yours. You were simply managing them as the trustee.
We frequently describe this as setting up a little company for your personal stuff. Think about Apple Computer, for example. At one point, Steve Jobs was running Apple as its CEO. Sadly, he developed cancer and became too sick to do the job. When that happened, one of Apple’s other officers, Tim Cook, had to step in and start running Apple. When that became necessary, Mr. Cook was able to take over immediately. He didn’t have to wait for a court to transfer all the assets from Mr. Jobs to him. They weren’t Mr. Jobs’s assets. They were Apple’s. Mr. Jobs was just running Apple. Transferring your assets from yourself to yourself as trustee of your trust can provide you with the same convenience.
If, however, you were holding your assets as trustee of your trust, the person you named to be your “successor trustee” in your trust agreement simply steps in and starts managing the trust assets the moment you can’t do it. No court authorization would be needed because, on paper, those assets weren’t yours. You were simply managing them as the trustee.
We frequently describe this as setting up a little company for your personal stuff. Think about Apple Computer, for example. At one point, Steve Jobs was running Apple as its CEO. Sadly, he developed cancer and became too sick to do the job. When that happened, one of Apple’s other officers, Tim Cook, had to step in and start running Apple. When that became necessary, Mr. Cook was able to take over immediately. He didn’t have to wait for a court to transfer all the assets from Mr. Jobs to him. They weren’t Mr. Jobs’s assets. They were Apple’s. Mr. Jobs was just running Apple. Transferring your assets from yourself to yourself as trustee of your trust can provide you with the same convenience.
Separating Ownership from control
Another common reason that people set up trusts is because they want to give assets to people who might benefit from letting someone else control those assets for them. There are situations where you have to do this. If you are directing the distribution of assets to someone who is currently 5 years old, for example, you have to give control of those assets to a responsible adult. The best way to do that is giving those assets to the adult as the trustee for the 5-year-old beneficiary.
Another common situation in which people want to use trusts is when they want to encourage a beneficiary to make certain decisions. They might, for example, instruct the trustee not to distribute assets until the beneficiary has successfully completed rehab, or held a job for a certain period of time. This can provide an option for giving assets to someone that otherwise might have to be disinherited (something that we often discourage). 
Another common situation in which people want to use trusts is when they want to encourage a beneficiary to make certain decisions. They might, for example, instruct the trustee not to distribute assets until the beneficiary has successfully completed rehab, or held a job for a certain period of time. This can provide an option for giving assets to someone that otherwise might have to be disinherited (something that we often discourage). 
asset protection for beneficiaries
Finally, something that many people fail to appreciate is the protection that it can provide for beneficiaries, not just from their own ill-advised decisions, but from others as well. To be clear, placing assets into your own trust over which you maintain control does not provide you with asset protection. (You may find that disappointing, but keep in mind that if you are ever injured by someone else’s negligence, you wouldn’t want that person to be able to avoid compensating you by putting assets in a trust that they continue to control.)
Assets placed in a trust for you by someone else, however, can enjoy protection, but only in proportion to the restrictions that were placed on the beneficiary’s ability to access those assets. If you have said, for example, that your kids have to ask a trustee for money from your trust, those assets are going to be very difficult for any creditor your kid might pick up to access. If your kid is in a troubled marriage, or has a high liability career, you might want to give them protection by limiting their access to your trust. On paper, this can look punitive. They may, however, be thanking their lucky stars if they get into financial distress.
Setting up a revocable living trust requires lots of decisions. Those decisions can have consequences for decades. You should only set up a trust with the guidance of an expert, one that has experience seeing how these work after the trustmaker has passed away. 
Assets placed in a trust for you by someone else, however, can enjoy protection, but only in proportion to the restrictions that were placed on the beneficiary’s ability to access those assets. If you have said, for example, that your kids have to ask a trustee for money from your trust, those assets are going to be very difficult for any creditor your kid might pick up to access. If your kid is in a troubled marriage, or has a high liability career, you might want to give them protection by limiting their access to your trust. On paper, this can look punitive. They may, however, be thanking their lucky stars if they get into financial distress.
Setting up a revocable living trust requires lots of decisions. Those decisions can have consequences for decades. You should only set up a trust with the guidance of an expert, one that has experience seeing how these work after the trustmaker has passed away. 
what next?
If you think it might be time to think through your estate plan, you can:
-  Give us a call at 720-821-7604 to schedule a "Discovery Session" at which we can determine whether our firm would be a good fit for your needs. Or fill out our contact form to have us call you.
- Visit our estate planning page to learn more about how proactively thinking through your estate plan can protect you and your family, minimize hassle, lower the chance of family discord, and minimize or eliminate taxes.
- Learn more by reading our blog or watching our videos .
Learn the legal grounds for contesting a will in Colorado, including undue influence, fraud, and lack of capacity. The McKenzie Law Firm, LLC helps Colorado families with will contests and probate disputes.
Learn the difference between an executor and a personal representative in Colorado probate law. The McKenzie Law Firm, LLC helps New York clients understand estate administration roles and terminology.
Learn the difference between an executor and a personal representative in Colorado probate law. The McKenzie Law Firm, LLC helps New York clients understand estate administration roles and terminology.
Learn how long estate administration takes in Colorado and what affects the timeline. The McKenzie Law Firm, LLC helps Denver families navigate probate and estate matters efficiently.
Learn the key legal reasons to contest a will in Colorado, including lack of capacity, undue influence, and fraud. The McKenzie Law Firm, LLC helps New York residents navigate estate matters.
Differences Between a Trust and a Will in Colorado
Who Can I Name as an Heir in Colorado?
Consequences of Dying Without a Will in Colorado
What Types of Assets Can Be Included in a Colorado Trust?
What is a Guardianship and When Do I Need One?
What Are the Required Documents to Create a Will in Colorado?