How Trusts Work

Trusts work in different ways and with different goals, but in all cases, trusts are governed by the directions set out in the trust agreement. As the settlor (creator) of the trust, you provide the "rules" which the trustee will follow.

Typically, the settlor creates the trust by signing a valid trust agreement and adding at least some sort of assets into the trust corpus.

If the trust remains unfunded (other than the nominal assets to make it valid), then the trust is inactive, since there are no assets to manage. If the settlor (or someone else) adds assets to the trust (by retitling assets into the name of the trust or making distributions to the trust from retirement accounts, a probate estate, or other source), then the trustee named in the document must manage and care for those assets. The trustee might be the settlor, a family member, some other trusted individual, or a professional bank or trust company (or a combination of these).

The trust document will provide instructions on how the trustee should manage those assets, including when the trustee should pay out income and/or principal to the trust beneficiaries.

The trust document may also set out the powers of the trustee to handle specific tasks, such as providing accounting of trust activities to the trust beneficiaries, paying taxes, and dealing with special assets or restrictions placed on certain beneficiaries. the document will also direct what happens if the serving trustee resigns or can no longer serve in that role by naming a successor trustee or a method for naming someone else to take over the role.

The trust will continue until the trustee distributes all of the trust assets and terminates the trust, again based on instructions provided in the trust document.

NOTE: Remember, assets managed by the trust are not owned by the settlor; they are owned by the trust. As a result, when the settlor passes away, the trust assets do not need to be transferred through a probate process; the trust will direct what happens, if anything, at that point.