What Is A Trust? Do I Need One?

A trust is a written document in which one person, known as the grantor (or settlor), transfers assets to another party, the trustee, to hold and manage for the benefit of a third party, the beneficiary. A trust is a legal mechanism that keeps various assets (i.e. cash, real estate, personal property) under the control of a trustee, who has a fiduciary responsibility to act in the best interests of the beneficiaries and distribute the assets according to the terms in the trust.

How Does a Trust Work?

The process of creating and operating a trust involves several key steps:

1. Establishing the Trust: The grantor creates a trust document that outlines the terms of the trust, including the assets being transferred, the trustee’s responsibilities, and the beneficiaries’ rights. The grantor then transfers ownership of the assets into the trust.
2. Role of the Trustee: The trustee manages the trust assets according to the grantor’s instructions. This includes investing the assets, distributing income or principal to beneficiaries, and ensuring compliance with legal and tax obligations.
3. Beneficiaries: The beneficiaries are the individuals or entities who benefit from the trust. Depending on the terms of the trust, they may receive income generated by the trust, distributions of the principal, or both.

The Grantor can be the Trustee and Beneficiary during their lifetime. After the Grantor passes, then a new Trustee is appointed via the terms of the Trust, and distributions are made to the remaining beneficiaries according to the terms of the trust, as prescribed by the Grantor. The trust can be recovable or irrevocable. 

When Is a Trust Necessary?

Trusts are not one-size-fits-all solutions and are not needed by everyone. Trust is particularly useful in the following scenarios:

1. Managing Complex Family Dynamics: Trusts can help ensure that assets are distributed according to the grantor’s wishes, especially in blended families or situations involving minor children.
2. Asset Protection: Irrevocable trusts can shield assets from creditors, lawsuits, or divorce settlements, providing financial security for beneficiaries. Irrevocable trusts must be incredibly thought out because they cannot be changed. 
3. Special Needs Planning: A special needs trust can provide for a disabled beneficiary without jeopardizing their eligibility for government benefits.
4. Charitable Giving: Charitable trusts allow you to support causes you care about while potentially receiving tax benefits.

When Is a Trust Not Necessary?

While trusts offer many benefits, they are not always the best choice. Here are some situations where a trust may not be necessary:

1. Simple Estates: A trust may be unnecessary if you do not have minor or special needs beneficiaries. Beneficiaries can often be named directly on assets like bank accounts, retirement accounts, and real estate, avoiding probate without the need for a trust.
2. Cost Considerations: Setting up and maintaining a trust can be expensive. Other estate planning tools may be more appropriate if the cost outweighs the benefits.
3. Direct Beneficiary Designations: Ohio allows for beneficiary designations on life insurance, real estate, and bank accounts. and investment accounts.  Utilizing Transfer on Death (TOD) or Payable on Death (POD) designations can achieve similar results without the complexity of a trust. These designations avoid probate. 
4. Limited Need for Asset Management: If your beneficiaries can manage their inheritance responsibly, a trust may not be necessary to oversee the distribution of assets.

Often, individuals believe a trust will avoid estate tax, which is not always accurate. Ohio abolished its estate tax in 2013. The federal estate tax exists, but in 2025, estates under $13,990,000 (for an individual) are exempt for estate tax purposes. Very few Ohioans have concerns with estate taxes. 

Conclusion

Trusts are versatile and powerful tools for estate planning, but they are not always the right solution for everyone. Often simpler mechanisms avoid probate and provide quick access to designated beneficiaries. If you’re considering a trust, evaluate your financial situation, long-term objectives, and beneficiaries. Doing so lets you make an informed decision that ensures your assets are managed and distributed according to your wishes.

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