What is a trust?

A trust is a legal arrangement involving three parties:

• Grantors: The person or people establishing and putting assets in the trust—often a parent, grandparent or other relative.
• A trustee: The grantor, a person trusted by the grantor, or an institution named by the grantor who administers the trust for the benefit of the beneficiary.
• A beneficiary: The eventual inheritor of the assets in a trust.

There are several types of trust. Two of the most common are:

• Revocable living trusts—the terms of this type of trust can be changed at any time by the grantor, who retains control of the assets and is often the trustee. A successor trustee is named to take over the management and distribution of the assets if the grantor becomes incapacitated or passes away.
• Irrevocable trusts—the terms of this type of trust cannot be changed. These types of trusts are more complex and established to help protect assets from lawsuits and creditors or to manage tax exposure.

In either case, the trust provides a legal structure to pass assets to beneficiaries privately and according to the terms of the trust document—without a trust, the ownership of assets would be decided through probate, which is a public process.

Assets are passed to the named beneficiaries, typically when the grantor passes away. If that's the case, the successor trustee will distribute the assets according to the terms of the trust document.

In addition to instructions on which beneficiaries will receive which assets, the grantor may have included other conditions, such as:

• The age or ages at which a beneficiary will receive the assets—a beneficiary may receive a lump sum, or only a portion of their inheritance and the rest later, for example at age 25 and age 40.
• The beneficiary attains a certain level of education before they receive the assets.
• Protections from the creditors or spouses of the beneficiary.
• Assets are automatically forfeited if a beneficiary contests the terms of the trust

Another thing to note is that some assets, such as a family cabin, are not easily divided among multiple beneficiaries. If the grantor anticipates joint ownership of an asset, the terms of the trust may require keeping the asset in the trust rather than dividing ownership. This approach can help protect the asset from a breakdown in relationships between beneficiaries or creditors of any single beneficiary.

What assets might you inherit that aren’t part of a trust?

There are some assets that aren’t typically put in a trust and that you may inherit without having to go through probate. These include

• Retirement accounts, such as 401ks and IRAs
• Life Insurance policies
• Money in Health Savings Accounts (HSAs)

If you become the beneficiary of a trust or receive a sizable inheritance from a retirement account, you may want to seek legal and financial advice. Asking for professional advice is particularly useful if you inherit assets from a trust, as it will help you to understand the terms of the trust and your options for managing your inheritance.

Wells Fargo & Company and its affiliates do not provide tax or legal advice. This communication cannot be relied upon to avoid tax penalties. Please consult your tax and legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your tax return is filed.

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