What will happen to your hard-earned wealth when you're gone? You can't take it with you, so you may want to set up a trust.

A trust is a legal entity created when a person puts assets under the control of a third-party, with the ultimate goal of providing benefits to (aptly-named) beneficiaries.

When assets are placed in trust and transferred to a trustee, the assets actually become the trustee's property but without conferring the benefit of asset ownership. In other words, the trustee is a temporary steward of the assets, the legal owner, but in name only. The trustee must manage the assets according to the parameters of the trust's instructions, otherwise known as the 'deed.'

Any asset or investment can be placed into a trust, making them powerful estate planning tools. First, transferring your assets to a trust effectively shields them from creditors. For example, if you found yourself unable to pay back a loan you had personally guaranteed, the lender could file a personal claim against you and come after all your personal assets. But if your personal assets had been placed in a trust, the plaintiff couldn't touch them.

Trusts can also reduce your tax bill. Income earned by a trust is taxed at 33%, the same as the rate paid by corporations but lower than the highest existing marginal rate (39%) for individuals.

Generally speaking, there are two basic types of trusts: fixed and discretionary. In a fixed trust, the deed fixes the number of beneficiaries and their shares. It's the simplest and most straight forward of trusts. For example: wealthy parents may set up a trust for a child to make sure that the child is adequately cared for if the parents die.

Discretionary trusts give trustees the latitude to decide who may be a beneficiary and what each beneficiary's share should be.

Regardless of whether it's fixed or discretionary, a trust always has four basic components. Keep in mind that it's common for there to be multiple people assigned to each category:

1) The settlor -- the creator of the trust.

The settlor must be an adult (defined in this case as age 20 or over) and of sound mind. The settlor is often an individual, but it can also be a corporation or another trust.

2) The trustee -- to whom nominal ownership of the assets is transferred.

Any individual who is able to own property is qualified to be a trustee. A minor (anyone under 20) is eligible to be a trustee, but a court must appoint a surrogate to act as trustee until the minor turns 20.

If a trustee violates his or her duties as spelled out in the trust deed, the law defines this as 'breach of trust.'

3) The beneficiary -- who ultimately benefits from the trust.

Beneficiaries are typically immediate or extended family members, although trusts can also name other trusts as beneficiaries – say, an environmental or animal rights trust.

Only beneficiaries are legally allowed to bring court action against trustees for breach of trust.

This trust deed delineates:

  • the category and mission of the trust

  • the parties involved

  • the trustees' ability and discretion to invest the trust's assets

  • requirements for decision-making by the trustees

  • how the trust's bank account is to be operated

  • the recording of minutes when trustees meet to discuss and make decisions

Trustee decisions must be unanimous, unless the trust deed explicitly makes an exception and grants the right to make decisions based on a majority vote. At all times, trustees must keep accurate minutes -- i.e., records of their meetings and decisions.

Trustees can get compensated for their time and effort in managing the trust, but the trust deed must make it clear that compensation is provided. A trustee can't be held liable for any losses incurred by the trust.

If you decide it's time for you to set up a trust, make sure you confer with an attorney experienced in estate planning. For information on other estate planning ideas, check out this article by John Persinos: A Clever Estate Planning Tool That Keeps You In Contol