I received this question from M.B., of Howard Beach, N.Y., who wrote:

I'm having trouble understanding the basics of Trusts and their use in Estate Planning. Can you help?

Dear M.B.:

I'm glad to help! Providing for the distribution of assets after death is not a task anyone eagerly approaches. It is, however, a task we must face. Trusts are one way of handling distribution, and trusts can be set up to handle a variety of situations. A trust is simply the legal relationship created when an owner of property (the grantor) transfers property to another person (the trustee) to hold such property for the benefit of a third party (the beneficiary).

The ability of trusts to bridge the gap between life and death is one of their most useful characteristics. Through a trust, the grantor may control their assets during life and after. A trust is often used for tax planning or to provide continuity in the management of a business. Also, trusts can be used to manage and protect assets for beneficiaries who are minors, or otherwise deemed legally incompetent.

With the growing problem of disabling diseases such as Alzheimer's, the value of establishing a Living Trust is increasing. A Living Trust is created during the grantor's life as opposed to a testamentary trust created by a will, which takes effect at death. Under a Living, or inter-vivos, Trust, the trustee may be empowered to handle business and financial matters for a grantor with deteriorating mental capacity, as well as the later administration of the grantor's estate.

Avoiding the publicity of probate may be an important consideration in setting up a trust. During probate of a will, the actions of the executor may be open to anyone wishing to look. While a trustee has many of the same tasks as an executor, the transactions themselves remain private.

Of course, potential estate and gift tax savings may be the deciding factor in setting up a trust. Even with recent changes in estate tax laws, trusts are frequently used to minimize the size of the grantor's present or future estate, thereby reducing estate taxes due. Through a properly structured trust, the grantor may be able to keep future appreciation in the transferred property outside of their taxable estate.

An example of such a trust is an irrevocable life insurance trust which often has the life insurance policy and then its proceeds as the sole asset. During the grantor's life, annual gifts of cash are given to the trust so the trustee can make premium payments on the policy. Using appropriate language, the proceeds remain out of the grantor's estate and may be income tax free as well.

Trusts serve many useful purposes. However, the law of trusts and estates is a complex area which is constantly changing. Consulting with your legal and tax professional will help to ensure that the trust you establish provides the benefits you intend.