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How Does a Trust Work in New York City?
A trust is one of the most useful tools for managing assets during life and passing them on at death, but the mechanics are not always obvious. This page explains what a trust is, who the players are, the main types of trusts used in New York, what they accomplish, and how one is set up.
What a Trust Is
A trust is a legal arrangement in which one person (the grantor) transfers assets to another (the trustee), who holds and manages them for the benefit of someone else (the beneficiary). Trusts are used in New York to avoid the time and cost of probate, to control how assets are distributed after death, to minimize estate taxes and to protect assets.
The Three Roles in a Trust
The grantor, also called the trustor or settlor, is the person who establishes the trust and transfers assets into it. The trustee is the person or institution designated to manage those assets; the trustee invests, distributes income, files the trust’s tax returns and keeps the records. The beneficiaries are those who receive benefits or distributions from the trust assets. They can be a spouse, children, other individuals or charities.
Some trusts also appoint a trust protector, whose job is to oversee and monitor the trustee’s actions to prevent abuse.
Types of Trusts
At the broadest level there are only two kinds of trust: revocable and irrevocable. Every other label describes a sub-type of one or the other.
| Type | What it does | Revocable or irrevocable |
|---|---|---|
| Revocable trust | Can be changed or revoked by the grantor. Assets remain under the grantor’s control during life. Avoids probate. Usually the grantor, trustee and beneficiary are the same person. | Revocable |
| Living trust | Created while the grantor is alive. Avoids probate in New York and lets a successor trustee manage assets if the grantor becomes incapacitated. The term is used interchangeably with “revocable trust.” | Revocable |
| Testamentary trust | Created in a will and takes effect only after death. Revocable until the testator dies. | Revocable until death |
| Irrevocable trust | Cannot be changed once executed. Provides tax advantages and asset protection. Used for Medicaid asset protection and eligibility for government benefits. | Irrevocable |
| Charitable trust | Leaves assets to non-profit organizations and provides tax deductions. | Irrevocable |
| Spendthrift trust | Protects trust assets from the beneficiaries’ creditors and lawsuits. | Irrevocable |
| Special needs trust | Allows assets to be used for a disabled beneficiary without affecting government benefits. | Irrevocable |
What Every Trust Needs
Whatever the type, a trust has two essential elements. The first is the trust document, the instrument that establishes the trust and sets out all of its terms. The second is the trust property: the cash, real estate, investments and other assets the grantor transfers into it. A trust with no property in it is ineffective, so signing the document is only half the job; the assets have to actually be retitled to the trustee.
What a Trust Accomplishes
The first benefit is avoiding probate. Assets held in a trust do not pass through the Surrogate’s Court, which saves time and legal costs in New York. The second is control over distribution. In an estate proceeding, assets are distributed outright once the estate is settled; a trust can specify who gets what and when, and can keep managing property for generations after the grantor dies.
Trusts also let a grantor maximize tax advantages for heirs, and they can keep assets safe from creditors, lawsuits and divorces. Finally, an irrevocable trust reduces what the grantor owns on paper, which is how it makes a person eligible for government benefits such as Medicaid.
How a Trust Is Set Up
If you are considering a trust as part of your estate plan, the process runs in four steps.
- Consult an estate planning attorney. Trusts contain complex terms and provisions and are not a do-it-yourself project. The attorney needs to understand your goals so the trust can be built around them.
- Name trustees and beneficiaries. Decide who will manage the trust and who will benefit from it. Designate successor trustees and successor beneficiaries, or a method of choosing them, in case your first choices are not qualified or are unable to serve.
- Draft and execute the trust document. The instrument is customized to your goals and then signed with the required formalities.
- Transfer the assets. Ownership is moved from you as an individual to the trustee, as trustee of the trust. Until this happens the trust holds nothing.
Trusts are the preferred estate planning tool of most estate planning attorneys in New York City, but they demand careful drafting and execution, especially irrevocable trusts, which usually cannot be amended once signed. If you would like help establishing a trust, or have questions about one that already exists, call us at 212-233-1233 or email [email protected].
About the Author
Albert Goodwin Esq. is a licensed New York attorney with over 18 years of courtroom experience. His extensive knowledge and experience make him well-qualified to write authoritative articles on a wide range of legal topics. He can be reached at 212-233-1233 or [email protected].
