Essential Parties to a Trust

• The person who creates a trust is called the grantor or, sometimes, the settlor. The manager who oversees the assets of the trust is called the trustee. In many cases, the grantor of a revocable trust is also the trustee, an arrangement that preserves a significant amount of control for the grantor. Most living trusts, which are almost always revocable trusts, are structured this way so the grantor has use and enjoyment of the trust assets during his lifetime. The final essential element to a trust are the third parties who ultimately own the assets of the trust, called the beneficiaries. If the grantor of a living trust is not also the trustee, she can also sometimes be a beneficiary.
  
  

Revocable and Irrevocable Trusts

• By far, most trusts are revocable. Essentially this simply means the grantor can amend or cancel the trust agreement at any time without the consent of the trustee or the beneficiaries. The opposite of a revocable trust is an irrevocable trust, which cannot be unilaterally revoked by the grantor. The IRS requirements for an irrevocable trust differ in an important way from most state laws. Typically the grantor of an irrevocable trust can serve as a trustee or maintain beneficial use of trust assets under state laws. For the IRS, the grantor of an irrevocable trust must have virtually no use or control over the assets or their allocation.
  
  

Tax Treatment

• The distinction between state and IRS standards for trusts bears on how the trust is taxed. A revocable trust is called a grantor trust by the IRS and is not taxed as a separate entity. The capital gains and other income of the grantor trust are taxed as personal income of the grantor. An irrevocable trust under the IRS' more exacting standards is treated as a separate taxable entity, though the tax rate on such trusts is very high. Another important distinction is that the assets of a revocable trust (under IRS standards) is subject to the estate tax whereas an irrevocable trust is not included in the decedent's estate.
  
  

Formation

• There are two types of documents used to create a revocable trust. They are generally interchangeable, although local custom in your state may prefer one over the other. A declaration of trust is a document that puts into writing the terms of a trust already established and entered into between the grantor and trustee through a meeting of the minds. A trust agreement is like a contract between the grantor and trustee. Both contain the terms of the trust. Usually the revocability of the trust must be made explicit, often in the title of the document.
  
  

Living and Testamentary Trusts

• As mentioned, living trusts are generally revocable during the lifetime of the grantor. This changes, however, once the grantor dies. At that point, the trust becomes irrevocable. It can no longer be modified or canceled except according to the laws and rules pertaining to irrevocable trusts. The opposite of a living trust is a testamentary trust, which only is created upon the death of the grantor by force of his will. A testamentary trust is irrevocable by nature.