A trust agreement is an estate planning document that helps you own property in a way that legally avoids probate. Probate is the formal term that describes how a judge orders compliance with your will after you die. Any property you personally own at the time of death must go through probate; however, any property owned by your trust does not have to go through probate.
A trust agreement involves three different parties, including a trustor, a trustee and a beneficiary. The trustor is the person who creates the trust and transfers property to the trust, while a trustee is the person who holds title to the trust property and invests and manages that property. The beneficiary is anybody that the trustor names as a recipient of income or distributions from the trust property.
Say you own a duplex that produces $1,500 per month in rental income. If you don't create a trust before you die, that duplex will pass to one of your heirs according to the terms of your will. But, if you create a trust agreement, you can avoid probate of the duplex. Instead, you will transfer title to the duplex to a trustee pursuant to the terms of a trust agreement. The trustee technically owns the duplex but is bound by the terms of the trust agreement. You would likely name yourself as the beneficiary as long as you are alive, which means the trustee will pay you all of the $1,500 rental income each month, and then when you die, you will probably name your spouse or children as the beneficiaries. So, after you die, your spouse or children will receive the $1,500 monthly income, or you could instruct the trustee to simply give title to the duplex to your spouse or children.
Trusts are extremely flexibly legal documents. When you create a trust you have broad discretion to dictate the terms and conditions of the trust. You can have one or many beneficiaries. You can give the trustee significant discretion regarding the trust property, or you can provide specific instructions for investing and distributing the trust property. You can leave 90 percent of the trust property to one beneficiary and the remaining 10 percent to nine beneficiaries. The terms are within your control.
As mentioned earlier, the most significant benefit of putting property under the terms of a trust agreement is that the property avoids the probate process. Probate is much like a lawsuit, meaning it requires a judge, a courthouse, and an attorney. For those reasons, probate can be expensive and time-consuming. Avoiding probate, then, can provide a significant benefit to your surviving heirs.
Some property works very well in a trust, but other property does not. Real property, such as a home, vacant land, or an investment property like a duplex or apartment unit, are great candidates for placement in a trust. Most personal property, including bank accounts, retirement accounts, cars and household goods, are better left out of the trust agreement because it is a hassle to keep the property in trust and you receive very little benefit from doing so.