When you give something to someone, you have two basic options. You can transfer it to them outright, or you can transfer it to them in trust. These transfers can occur while you are living or at the time of your death.

The simpler and more familiar of the two is to give it outright. The property is transferred from your name to their name. They become the owner.

The less-familiar option is to transfer the property in trust. This transfer will not be as simple, so why bother if it’s less familiar and more complicated?

A transfer in trust involves some terms or conditions that go with ownership of the property. For a time, the ownership is divided into legal title held by a trustee, and beneficial ownership held by the beneficiary. There should be a written agreement as to who is the trustee, who are the beneficiaries, how each beneficiary will benefit, and for long the trust will last.

For example, you might transfer property to Tom as trustee, so he will hold legal title. Your agreement with Tom is that he will give the income from the property to Alice for 20 years. This makes her a beneficial owner for that period. Then Tom is to give the property to Bob and the trust ends. During the 20-year term, Bob is the remainder beneficiary since he is entitled to receive what remains at the end.

Protect property

Notice how a trust is intended to protect the property. No one who has a claim against Alice can take the trust property, because her rights to that property are limited to receiving income. A claim against Bob can’t reach the property during the 20-year term since he doesn’t really own it yet. No claim against Tom can touch the property because it isn’t really his: He is simply administering it for the beneficiaries.

A trust is sometimes viewed as making your gift “with strings attached,” since it tells Tom what to do, it prevents Alice from controlling the property, and it delays Bob’s benefits. The traditional motivation for creating trusts was this desire to dictate what would happen well after you’ve made the gift. There are obvious reasons to do this. Someone who wants to provide for minor children needs to give responsible, mature Trustee Tom the control of those assets until the children grow up.

The trust for minor children offers a great illustration of another trust concept: discretion. You don’t know how much money the children are going to need on a day-to-day basis, so the trust gives Tom the authority to distribute (in other words, spend for the children) whatever amount he thinks they reasonably need, such as for their health, education and maintenance. Tom might distribute some or all of the income of the trust for these purposes. If the trust holds liquid assets, he might also distribute from the principal of the trust. You appoint him because you trust him to use good discretion.

Discretionary trusts are also good for beneficiaries who are eligible for governmental assistance, and for irresponsible beneficiaries who can’t handle money.

Estate tax protection

But is a transfer in trust useful if you don’t need to attach strings to the gift?

The most powerful use of a trust is for Perfect Patti, the beneficiary who is perfectly mature and capable. You name Patti as the trustee and give her sole authority for management and investment of the assets. Patti can distribute income and principle to herself as needed for her health and maintenance. The only real condition placed on Patti is that she not spend more than she considers appropriate to maintain a comfortable standard of living. Because she’s responsible, she wouldn’t anyway, of course. If she manages it well, the trust will last for her lifetime, and probably even grow. Patti can appoint what is left at her death to remainder beneficiaries she chooses.

If she gets so much control anyway, why bother with a trust instead of just making the gift to Patti? First, the trust protects the property from claims that could arise any time during Patti’s life. But in addition, it protects the property from estate taxes when Patti dies. That could be a big deal.

Got good kids? Give them all the advantages you can, like a beneficiary-controlled asset protection trust.

Ferguson is an attorney who owns The Estate Planning Center in Salem, Ill. Learn more at thefarmersestateplanningattorneys.com. The opinions of this writer are not necessarily those of Farm Progress/Informa.