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A Guide to Private Trusts

What exactly is a private trust? How do they work? How can you create a private trust? We answer those questions and more in this guide.

Patrick Hicks

Patrick Hicks, @PatrickHicks

Head of Legal, Trust & Will

Estate planning can be confusing when you’re new to it. There are multiple moving pieces and a number of things that sort of all sound the same, but actually have very different meanings and functions. So if you’ve ever wondered what a Private Trust is, how it works and how it differs from Public Trusts, you’re not alone. Private Trusts are yet another tool you can use in your Estate Plan that can protect you and your loved ones from disaster. 

When you have the right plan in place, you can rest easy, knowing that your wishes are known and will be respected when the time comes. How can a Private Trust fit into the equation? Read on to find out. We’re covering everything you need to know about how to create a Private Trust so you can quickly simplify the long-term management of multi-generational family assets. 

What Is a Private Trust? 

Private Trust Definition: A Private Trust is a legal contract that holds and manages assets for relatives, family members and friends of the Grantor (the Trust creator and owner). There are three major components to any Trust:

  • Grantor: A Trust is created by a “Grantor,” who may also be referred to as a “Trustor” or “Settlor.”

  • Trustee: Trusts are managed by a “Trustee” (or Trustees) who oversees and manages the Trust and its assets.

  • Beneficiaries: A Trust benefits persons or charities, known as the “beneficiaries.”

In legal terms, a Private Trust is a “fiduciary relationship” that grants a beneficiary the right to money or property. Private Trusts can survive the Grantor’s death, and may also be created through direction in a Living Will. In the latter case, the Trust will be formed after the Grantor’s death.

How Does a Private Trust Work?

A Private Trust is an estate planning vehicle that transfers control of certain assets from the Grantor to the Trustee. The Trustee then manages the assets while ensuring that certain long-term conditions remain in effect as set forth by the Grantor. 

The Trustee carries out the wishes and instructions of the Grantor as noted within the Trust document. Trustees have the job of managing the assets within the Trust for a specified time period and then allocating them to the beneficiaries according to the directions within the Trust. In many cases, the Trust continues to be active long after the Grantor has died.

There are two primary types of Private Trusts: Living (or Revocable) and Irrevocable. 

A Living Private Trust can be changed and controlled. 

An Irrevocable Private Trust cannot be easily altered or modified. 

Once property, money or other assets are transferred to the Trust, they’re what’s known as Trust-owned. Contrary to popular belief, assets in a Trust do not belong to the Trustees. Of course, Trustees may receive financial or other benefits for their management responsibilities, but that would be defined in the Trust and either paid out of the Trust or the estate.

All assets remain controlled by the specific rules of the Trust until its termination. Termination typically occurs when assets have been fully dispersed or otherwise depleted.

Private Trust vs Public Trust - What’s the Difference? 

Public Trusts (or Charitable Trusts) are created for the benefit of a religious or charity, or for a charitable purpose. They are often established for the benefit of the public, too, though. An example of this would be if you belong to an organization or religious institution, and you made that institution beneficiary of a Private Trust, the money that the organization receives will ultimately benefit all members of the group, not just the organization as a whole.   

One of the major differences between a Private Trust vs Public Trust is that Public Trusts are open for scrutiny. As a result, transparency is both necessary and important for a Public Trust, since at any time anyone with an interest in the Trust has the right to demand he or she knows specifics about the management of the Trust. 

By contrast, a Private Trust is set up to benefit one or more specific people. Private Trusts typically terminate upon the completion of their purpose, such as a given amount of money being dispersed in monthly installments until the funds are depleted.   

How to Create a Private Trust

Creating a Private Trust can be fast and easy. It begins with the Grantor penning a Declaration of Trust (Trust Agreement). This is also known as Executing a Deed (called a Trust Deed). The written document outlines the conditions that relate to the management and control of assets. It also assigns specific beneficiaries and identifies the Trustee or Trustees. 

Next, the Trust must be funded. This involves the Grantor simply transferring assets to the Trust. Assets commonly controlled by a Trust can include real estate, cash, life insurance policies, stocks & bonds, motor vehicles, antiques, watercraft and personal property.

Planning beneficiary disbursements for a Private Trust can be challenging for many people. But working with the right online estate planning platform can make all the difference in the world. Working with a trusted online estate planning service makes creating a Private Trust easy - and it might actually even be more affordable than you may think. A quality service can offer you direct guidance about taxation, estate and financial planning. Some platforms even allow you to work with legal professionals, which is especially useful if you’re hoping to ease your mind and take the headache out of the process.

Creating a Private Trust is one way you can leave a lasting legacy. Protect the family, friends and causes that are closest to you by taking your estate planning seriously. When you’re smart, you can build an estate that continues to give back, even when you’re no longer here to do it yourself. 

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