What are Trusts?
A trust is a fund you establish to provide financial benefits for an individual or an organization. You choose which of your assets to put into the trust. Generally, most types of assets, except individual retirement accounts and qualified annuities, can be put into a trust. A trustee or trustees manage the assets.
- The person who established the trust is called the grantor.
- The recipients of the trust are the beneficiaries.
- The trustee has a legal responsibility to manage the assets as specified by the grantor.
Distribution of the income from the trust or the assets in the trust is generally made based upon specific requirements set up by the grantor. These distributions may provide for the beneficiary’s living expenses, the beneficiary’s education, or when the beneficiary reaches a certain age.
I don’t have a large estate, why would I need a trust?
Trusts are used for a variety of reasons to protect assets today and in the future. Trusts are often considered a tool for the wealthy, but trusts can provide asset protection for people with limited estates, especially if they want to make sure that their beneficiaries have access to financial resources. Some reasons to establish a trust include:
- Providing assets for the care and expenses of minor children or disabled dependents
- Protecting your assets from being depleted in the case of a long illness
- Keeping your assets separate from your estate and/or not subject to probate when you die
- Determining how your assets should be managed and distributed. Trusts can stipulate that income only should be distributed, that assets cannot be distributed until a beneficiary reaches a certain age, the types of expenses the trust can cover, or other stipulations.
- Providing a charity or charities with assets and instructions for their use, or
- Reducing your estate taxes.
Different types of trusts have different legal and financial requirements tied to their purpose and the benefits they provide. You should consult with an estate or trust attorney, or a professional who specializes in trusts, to make sure that your trust is structured to meet your needs and clearly states your wishes and stipulations.
What types of trusts are there?
There are many types of trusts, each structured to meet a specific purpose. Below is an explanation of the three basic types of trusts.
- Revocable Living Trusts provide you with control over the trust during your lifetime. You are able to move assets in and out, alter the trust, or terminate the trust. Assets held in a revocable trust are not subject to probate, allowing your assets to move quickly to your beneficiaries with complete privacy. However, since you maintain control of the trust, it is considered part of your estate and may be subject to estate taxes.
- Irrevocable Trusts generally cannot be changed or terminated after they have been created. Once assets are assigned to the trust, they cannot be removed. Since you do not have control of the assets in the trust, it is not considered part of your estate and is not subject to probate or estate taxes. Irrevocable trusts can be set up to provide income for beneficiaries, such as a child, both during your lifetime and after your death, and to reduce estate taxes.
- Testamentary Trusts are created within your will and become effective at the reading of the will. The trustee then takes control of the assets as designated in the will. This type of trust goes through probate and may be subject to estate taxes.