What is a trust agreement and why so many families use them

Helping advisors explain a powerful but often misunderstood document

In this video, CJ Eagar, our Chief Legal Officer and attorney, breaks down one of the most important but often misunderstood estate planning documents: the trust agreement.

Like a last will and testament, a trust sets out instructions for what should happen with your assets. But it goes further. When you create a trust, you’re not just writing instructions. You’re creating a legal entity that can hold, manage, and distribute property according to rules you set.

Think of it like forming a small company. Just as an LLC has a name, a structure, and officers, a trust has a title (say, the Smith Family Trust) and defined roles. The key difference? That entity outlives you. When it does, the trust keeps following the instructions you left, without waiting for a court to get involved. For your family, that means less time trying to figure out what you intended and more time moving forward with a clear direction.

Trusts vs. wills: what’s the difference

Both wills and trusts direct how assets should be handled when you pass, but they function very differently:

A will takes effect at death and usually requires probate. Probate is the court process that validates the document and oversees distributions. ‍

A trust takes effect as soon as it’s created and funded. Assets inside the trust are legally owned by the trust itself. This means they can be distributed without going through probate.

The real question for most families isn’t whether to have a will or a trust. It’s whether they want their estate handled in probate court or out of probate.

Why trusts are so popular

Most people don’t realize that a will becomes a public document the moment it enters probate. The value of your assets, who received what, and who was left out are visible to anyone who looks. A trust keeps all of that information private.

A trust plays another important role. It’s a communication line between you and your family. The instructions you leave inside your trust speak for you if you become incapacitated, before death ever enters the picture. Your family isn’t left guessing or waiting on a court to sort things out. You already told them what to do.

Other practical reasons families choose trusts:

Cost: Probate can eat up 3-7% of the estate’s value in fees and court costs. 

Time: The probate process can drag on for months or even years. 

Control: Trusts can set expectations and conditions for how and when assets are distributed. For example, funds can be released when a beneficiary reaches a certain age or completes an educational requirement.

The key roles in a trust

CJ often compares a trust to a small organization, and he’s right, because it has “officers.”

Grantor (or settlor/trustor): Creates and funds the trust. 

Trustee: Manages assets according to the trust’s instructions. 

Beneficiaries: Receive the benefits of the trust.

In many cases, the grantor serves as their own trustee during life, then names a successor trustee to step in at incapacity or death.

Common types of trusts

Trusts aren’t one-size-fits-all. Different structures exist to solve different problems, and understanding the major categories helps families and advisors find the right type of trust for their situation:

Revocable living trust: The grantor keeps control during life and can amend or revoke it at any time. Assets inside a trust bypass probate, but the trust doesn’t protect them from taxes or creditors. 

Irrevocable trust: Designed for long-term planning, these trusts generally cannot be altered once created. They can remove assets from a taxable estate, shield property from certain creditors, and be structured to support charitable giving. 

Testamentary trust: Built into a will and activated only after death, this structure provides ongoing oversight for children or beneficiaries who shouldn’t inherit assets outright. Because it flows from a will, it still goes through probate before becoming effective. 

Special needs trust: Preserves eligibility for benefits like Medicaid or SSI while providing supplemental funds for a beneficiary with disabilities. It can cover housing, medical needs, or quality-of-life expenses like transportation and personal care, without jeopardizing public support.

Why a trust isn’t enough on its own

A trust answers one question: what happens to the assets inside it. Estate planning involves more questions than that, and each one requires the right document. Who steps in to manage finances or make medical decisions if you become incapacitated? Who raises your minor children? What happens to property left outside the trust? Without the right documents in place, those questions get answered by a court or by state law, not by you.

A will: Serves as a safety net for property left outside the trust and names guardians for minor children. Without it, state intestacy rules decide both inheritance and guardianship. 

Powers of attorney: Authorize someone you trust to handle financial or healthcare matters if you’re incapacitated. Most parents don’t realize that when a child turns 18, they no longer have legal authority to make decisions for that child without a POA. 

‍Advance directives: Document your preferences for medical treatment and end-of-life care. These instructions prevent confusion during emergencies. Otherwise, your family may be forced to make decisions without knowing what you would have wanted.

Pitfalls to avoid with trusts

Trusts only work as intended when they’re drafted carefully and maintained over time. A trust that isn’t properly funded or updated can leave beneficiaries in the same situation you were trying to avoid in the first place.

Common errors to avoid:

Not funding the trust: Assets must be retitled into the trust. Property left outside is still subject to probate. 

Forgetting updates: Major life changes like marriage, divorce, new children, or new property purchases require the trust to be reviewed and adjusted. 

Choosing the wrong trustee: The trustee must be trustworthy, organized, and capable. A poor choice can lead to mismanagement or conflict. 

Overcomplicating rules: Conditions that are too restrictive can make administration burdensome and frustrate beneficiaries. Clear, flexible instructions are easier to follow and less likely to cause conflict.

Final takeaway

CJ, our Chief Legal Officer, explains that a trust agreement is more than just paperwork. It’s the creation of a legal entity establishing its own rules, roles, and responsibilities. When a trust agreement is properly designed and the trust is funded, it keeps assets out of court, provides privacy, and gives you a clear way to communicate to those you love what to do when you can’t tell them yourself.

The will, the powers of attorney, and the advance directives each answer important questions. The trust answers what to do with assets placed in it. Together, they make sure that no matter what happens, the people you love know exactly what to do.

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