A trust refers to property held by a "trustee", which may be one or more individuals or an institution such as a bank. A living trust does not become effective until you die, so that during your lifetime you may modify or revoke your trust. When you die the trust takes effect and is managed by trustee you chose, pursuant to the instructions you left in the trust instrument. A living trust is a powerful tool to avoid probate, as trust assets are normally distributed independently of the probate court.
The person who creates a trust is known as the "grantor" or "settlor", and the people who receive income or assets under the terms of the "trust agreement" or "declaration" are known as "beneficiaries". Ordinarily, once assets are placed within a trust, the terms of the trust dictate how those assets will ultimately be distributed even if there is a separate will.
Note that every complete estate plan also includes a will. No matter how much property you transfer into your trust, it is possible that you will forget to transfer something in, and your will ensures that it will go to your heirs as you intend. Also, you will have items of personal property, even if just your clothing and personal effects, which will fall into your probate estate.
A "grantor", sometimes called a "settlor" or "trustor", is somebody who has created a trust.
The property placed in a trust is known as the principle or "corpus" (a latin word for "body") of the trust.
A testamentary trust is created by a will;
A"living trust" or "inter vivos trust" is created by a person who is still alive.
If the trust can be changed or terminated after it is created, it is a "revocable" trust. If it cannot be changed or terminated, it is an "irrevocable" trust.
A Word of Caution
If you intend to place assets within a living trust while you are alive, make sure that the transfers are made. There have been many cases where people set up detailed living trusts, but neglected to fund them, with the result that they paid for a trust they did not use and their assets passed according to the laws of intestate succession instead of as they intended.
When Trusts Are Particularly Useful
Trusts can be a valuable estate planning tool for parents who are concerned that their children are not sufficiently old or mature to manage a full inheritance. A trust can provide for the inheritance to be passed to them when they are older, even well into adulthood, and can provide for such things as educational expenses. There are also a variety of trusts, including "special needs" trusts, which can be set up to benefit somebody who is dependent upon public assistance due to a disability
A living trust can also provide for the management of your assets while you are alive, and can help prevent the necessity of having a guardian appointed to manage your affairs in the event of incapacity.
With large estates, living trusts can provide a valuable means of avoiding gift and inheritance taxes, and for taking care of even generations of heirs.