How A Trust Works

Overview

Creating a trust is one of the most effective ways to protect your assets, avoid probate, and ensure your wishes are honored. In this conversation, Michael Rutkowski of Rutkowski Law Firm explains exactly how a trust works, why it avoids probate, and what steps you need to take to properly fund and maintain it. Think of a trust not just as paperwork, but as a legal entity — much like a business — that manages your assets during your lifetime and distributes them according to your wishes after you pass.

Key Takeaways:

• A trust operates like a legal entity, similar to a business, and owns your assets, allowing it to avoid probate.
• During your lifetime, a revocable living trust uses your Social Security number and does not require a separate tax ID (EIN).
• After your passing, the trust becomes irrevocable, and an EIN must be obtained for trust administration and tax purposes.
• Funding the trust is critical — assets must either be retitled in the trust’s name or have proper beneficiary designations.
• You may need to work with a CPA, especially for trust tax filings, but it’s not always mandatory.
• Regular checkups every 3–5 years are important to ensure all assets are correctly aligned with the trust.

Full Transcript

Hello. Welcome back to Life Lessons with Mike Rutkowski as we continue to understand trusts and how they work.

We talked previously in a few other episodes about how there are over 60 types of trusts you could have, how they are more important than a will, and how they keep you out of probate — unlike just having a will.

Today, we want to walk you through how a trust actually works.

Mike, welcome back.

Thanks for having me.

You know, it's a question we get all the time: Why does a trust avoid the probate court?
It's not just someone arbitrarily saying, "Trusts don’t go to probate." There’s a reason behind it.

• A will is simply evidence you provide to a judge about how you want your assets distributed.
• A trust is a legal, binding contract — like creating a business entity.
• You move your assets into the trust (the "business"), and you, as the grantor, are the CEO.

How a Trust Functions

This trust document sets all the rules:

• If you're incapacitated, a successor trustee steps in to manage the trust according to your wishes.
• If you pass away, the trust lays out who inherits what and how, without needing a court's involvement.

Why It Avoids Probate

It avoids probate because the trust owns the assets, not you personally.
Since the trust doesn’t die — only the grantor does — there’s no need for the court to supervise the asset transfer.

Setting Up a Trust and EIN Numbers

You might wonder: "Does the trust need a separate government number, like a business EIN?"

• During your lifetime with a revocable living trust, you do not need a separate EIN — it uses your Social Security number.
• After your death, the trust becomes irrevocable, and that’s when you must obtain an EIN and file separate taxes.

Handling Bank Accounts and Assets

• During your lifetime, you don't necessarily need to open a new bank account, unless it makes sense for certain irrevocable trusts.
• At death, for irrevocable trusts, you'll need to open a trust bank account tied to the EIN.

Funding the Trust

• Revocable Living Trust: You can retitle assets into the trust or set beneficiary designations that flow into the trust at death.
• Irrevocable Trust: Assets must be retitled during your lifetime.

Working with Professionals

You don't have to hire a CPA to handle tax filings for your trust, but it’s highly recommended, especially after death when filing requirements change.

Importance of Funding

Funding is crucial:

• Even if you work with an attorney, not all attorneys handle the funding part — some will just create the trust document and leave the funding to you.
• Regularly review your assets every 3–5 years to make sure everything is properly titled and set up to flow through your trust.

If you would like to create a trust and protect your assets — or if you have questions about funding or managing an existing trust — the Rutkowski Law Firm is here to help.
Please call us at the number below.
If you're in another state or just starting your journey, feel free to drop your questions below — we're happy to help however we can.

Mike, thank you as always for your wise words.

Thanks for having me. We'll see you next time.

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