I admit it: Legal terminology is confusing.

Not only are some words foreign outside of the estate planning world, but sometimes “normal” words carry a legal definition you would have never guessed. And sometimes, the same legal concept has more than one phrase used to describe it. Take “Living Trust” and “Revocable Trust” and “Revocable Living Trust,” for example – all three of these terms are used to describe the exact same thing. And the term “Irrevocable Trust” is used to describe many different things. (Confused yet?)

So what is a trust?

In one sentence, a trust is an entity that can hold assets.

More specifically, a Revocable Living Trust is designed as follows:

• You can revoke it, amend it, update it, rewrite it – you have full control. When you set up a Revocable Living Trust and move your assets into it, you still retain full control over these assets.
• You create it while you’re alive. This is in contrast to a trust that comes into being only through a last will and testament, i.e., the trust doesn’t exist until you’ve passed – this is called a testamentary trust.
• An entity that can hold assets.

Why is this important?

Let’s use your home as an example: your home is owned jointly with a spouse. Your last wills say you leave everything to the surviving spouse and then ultimately to your children. If you both pass away simultaneously (after all, you spend a lot of time in the car together and traveling together), your children get title to your home, right? Not so fast.

As far as the county is concerned, the names on title are still your and your spouse’s names. Even if your children provide the county with a death certificate, title is still in your names even though you’ve passed. Only a court order can legally update the property records to change title from your names to that of your children. In other words, a judge’s signature is being substituted for yours (since you’ve passed and can’t sign) to convey title to your heirs.

When you set up a Revocable Living Trust and move title of your home from your joint names to your trust name, your children don’t need a judge involved at all.

Instead – going back to our example – when you pass away, title is in your trust’s name but your trust hasn’t died. All that has happened is you’ve passed the reigns of trustee to your successor trustee; title is still in your trust’s name. All your successor Trustee has to do is present your Trust document to anyone who asks as proof that the successor Trustee can manage the property. No judge is necessary.

“But trusts are only for the rich, right?”

Trusts – both revocable trusts and irrevocable trusts – are very efficient tools to help any family or individual avoid the probate court, no matter how much you have or whether you have children.

I don’t like the notion that “only if you have at least $X in net worth then a trust is right for you” – because you can ask twenty different people what that number is and you’ll get twenty different answers.

If you don’t want your family to have to deal with the headache of the court system after you pass, then a trust is right for you.

How does an Irrevocable Trust fit into the picture? The concept is the same – this is an entity separate from you that can hold your assets. But with an Irrevocable Trust, you lose most or all control over the trust and the trust property after you set it up, hence the word “irrevocable.”

You might set up an Irrevocable Trust to minimize estate tax or to achieve charitable giving goals. The IRS has very specific rules on how an Irrevocable Trust can minimize or eliminate the tax owed by your estate and it is important work with an experienced estate planning attorney when utilizing irrevocable trusts.

What’s the bottom line? Should you use a Revocable Living Trust, Irrevocable Trust, neither, both…?

Regardless of what a trust is named, the terms and provisions contained in the actual written trust agreement dictate how the trust will be administered and managed for your children and other beneficiaries. The name of the trust is for colloquial reference only and usually has no legal meaning separate from the terms in the document itself.

The bottom line is that trusts are a magnificent tool for avoiding probate and minimizing taxes, as long as the trust is drafted by a competent, experienced attorney who you trust and who knows the right questions to ask so they can see the big picture.