Throughout this section, we mention transferring assets to loved ones. The problem is, once your heirs receive their property, they may still need continued protection from outside creditors or even themselves. You can provide continued protection by making transfers to a trust.

A "trust" is a separate legal entity that controls the assets you place into it (these assets are called the "trust principal" or "trust corpus"). You are known as the "grantor" of the trust, since you were the one who created it. The grantor decides who gets income and/or actual principal payouts from the trust. The people receiving the payouts are known as "beneficiaries." The person who administers the trust and makes sure all the beneficiaries are provided for is the "trustee." Some trusts also have someone in the role of "trust protector." A trust protector has powers set forth in the trust document to assist in guiding both trustees and trust beneficiaries through legal and tax complexities to realize the grantor's original intent.

The rules that you dictate the trust to follow (how long the trust should last, who gets what, and other rules the trustee has to follow) are known as the "trust terms." An attorney is needed to do the paperwork to get a trust started. The document that defines the trust is known as the "trust agreement." Trusts become active as soon as they receive assets, either by you transferring assets to the trust during your life or through your will.

Trusts can be powerful tools when used properly. Let's go through a hypothetical example. If you want to give your child a large inheritance, but you want to make sure that he is a certain age before he manages the money, while at the same time the money is available if your spouse faced an emergency, your trust might say (we'll simplify the language here—an actual trust agreement would be much longer):

• Trustee shall collect and invest all income until such time that David (your son) becomes 25, then pay him one-half the amount in the trust. At age 30, the trustee shall pay the balance of the trust principal to David.
• If David dies before Jack, distribute all principal to Jack immediately. If Jack dies before David, and David dies before age 25, the trustee shall give all trust principal to the Easter Seals Society.

Work with your attorney to develop specific language for any trust arrangement you make.

When prepared properly, a trust can protect the assets from creditors of the beneficiaries. It is also difficult for spouses of your beneficiaries to attack the principal in a divorce proceeding or as a right of election if your beneficiary dies. The best part is that the beneficiaries can't waste the entire amount in the trust, just the amount that is distributed to them.

IMPORTANT NOTE: The instructions that you give the trustee in the trust agreement should be very clear and designed to avoid any confusion. Any gray areas may lead to legal troubles, and battles between trustees and beneficiaries can become complex.

SUGGESTION: Always pick a trustee who will be fair to all beneficiaries. As is the case with executors and guardians, pick alternate trustees. The trustee and all alternates should be trustworthy and have ordinary good business sense. This could be an individual. However, it may make sense to name a bank or trust company to oversee your estate or trust.

SUGGESTION: If the amount being transferred is very small, you may want to give the amount outright. If you do decide to create a trust, consider giving the trustee the right to pay out principal if the amount in the trust becomes very small.

SUGGESTION: Timing is everything. The only way to have the following documents become legal—this applies to wills and trusts too—is if you are of "sound mind" when you sign them (this mental ability is called "capacity"). If you wait too long to have these documents prepared, injury or illness may cause you to lose capacity. Then it is too late.