The major family estate planning functions that trusts are required for are:

• Management of the estate during incapacitation.
  
  
• Probate avoidance.
  
  
• Reduction or elimination of estate taxes.
  
  
• Controlled transfer of estate to proper heirs.
  
  
• Protecting the estate from lawsuits & seizures.

A trust is a legal entity or device used to take care of property in special ways. Trusts are created by a contract between two parties. These parties are known as the grantor and the trustee. The grantor and trustee create the contract for the benefit of a third party known as the beneficiary. This contract is a private agreement and is not an arrangement created by state statutes (as are corporations, for example). This is an important feature because private contracts have tremendous flexibility in their structure. Even though a trust is a private contract or agreement, it is recognized by the laws and courts as an independent legal entity. In fact, trusts are independent entities very much like corporations.

As stated above, trusts have three parties to them: grantor, trustee, and beneficiary. Grantors are the individuals who own property which they wish to have managed, controlled, protected and transferred to heirs by a trust. Once their property is in the trust the grantors no longer hold the legal title to the property, though they usually retain the exclusive rights to use the property or its income and usually retain full control of the property. The trustee is the legal administrator of the trust and the legal title holder of the property. The grantors' relationship to the trust is determined by the language which they put into the trust contract. The beneficiaries are the individuals or charities that receive benefits or income from the trust property, and eventually receive the property itself. When the grantors retain for their lifetime the rights to the income and use of the trust property, then the beneficiaries will receive their benefits after the grantors die. In some cases the grantors and beneficiaries both receive benefits from the trust simultaneously.

A family trust in which the grantors hold all three positions -- grantor, trustee, and beneficiary -- is known as a living trust. This is the type trust that is most frequently used in estate planning. Technically, a living trust really isn't a trust though because it is not a contract between two separate parties, grantor and trustee. There is in fact just one party in the living trust, the grantor or grantors. Since one party cannot write a legally binding agreement with itself, the living trust is not a contract, not a complete trust during the lives of the grantors (even if there are two grantors, legally they are still one party). Therefore the living trust arrangement is not recognized by the laws and the courts as an independent entity. It is simply thought of as an extension of the grantors and as a special way the grantors have titled their property. However, if the grantors appoint an independent or separate trustee to administer the revocable trust and to hold legal title, there is then a real contract and a real trust regardless of who the beneficiaries are.

If the grantors retain the rights to the benefit, use or income of the property in the trust, then the grantors are also the primary beneficiaries. In that case the heirs who are named to inherit the trust property after the deaths of the grantors are known as remainder or secondary beneficiaries. If the grantors do not retain economic benefit or control of the trust property, then their heirs are named as the current beneficiaries.

Revocable and Irrevocable Trusts. An arrangement where the trust may be revoked or canceled at will by the grantors is known as a revocable trust. If a trust cannot be canceled by a family member without permission of all the other parties to the trust, the arrangement is called an irrevocable trust. Irrevocable trusts are recognized as independent legal entities whereas revocable trusts are not.

The well known living trust is a revocable type. However the grantors may want instead to have an irrevocable trust and then receive some special or extra benefits. The irrevocable, trust is the basis for many arrangements clients set up for the purpose of owning life insurance that will be used for the payment of estate taxes.

Trust Functions. A trust's first function is that of representing the beneficiaries. A trust becomes virtually one and the same as the beneficiaries for purposes of estate planning and taxation. Therefore, a gift to a trust is a gift to its beneficiaries. A loss of net worth in the trust is a loss to the beneficiaries. For tax purposes, the trust may be invisible, or nearly invisible. This means that the taxing authorities may not even recognize the trust, and will tax the beneficiaries as if the trust did not exist.

The method of holding title is the second trust function. In many cases a trust will do nothing but hold title to property for the grantor. For tax purposes, nothing changes in that case. A living trust is a good example of that, but even irrevocable trusts can be little else but a change in the way title is held.

Equitable Title and Legal Title. A trust divides the property and its title into two components, equitable and legal title. Equitable title means the economic or financial interest in the property. Legal title means the person or entity in whom the property is legally named, or the legally named owner. All property has these two components, legal and equitable. Since the legal and equitable interests can be separated, that implies that two different people can own these two interests in one given piece of property. An everyday example of this division of interests is in the purchase of an automobile which is financed at a bank. The bank may physically hold the title and the title will reflect that the bank is the lien holder. Either by the bank physically holding the title or by having the bank listed as lien holder on the title, either one of these two mechanisms gives the bank control of the legal title. But, the driver, and the borrower of the money, has an equitable interest in the automobile. In other words the driver gets economic benefit from it. The bank does not have the use and benefit of the vehicle, so they do not own an economic interest. However, it takes both the bank and the driver to sell the car. If the driver wants to dispose of the automobile, the two parties have to get together; the driver to convey his economic interest, and the bank to convey legal title. Neither party can sell the vehicle without the other.

From the above example it can be seen how there can be separate legal and equitable interests in one piece of property. Trusts do the same thing. The trustee holds legal title to all the property, but the beneficiaries get the benefit; the economic interest, so they get equitable title. The trust contract may specify that the trustee has discretion over the distribution of the income. The trustee may control the timing and the amounts of the distributions to the beneficiaries but, in the long run, the beneficiaries will receive the assets in the trust.