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What is a trust?
A trust is a relationship in which trustees hold the assets of an individual for specified beneficiaries. While assets no longer belong to the person after they are transferred, grantors may set provisions for how the assets are divided or distributed. For instance, a person might set up a trust fund for his 19-year-old child, but restrict his access to the money until he turns 21 or gets a college diploma.
A trust is not an account, but rather a legal document that certifies ownership of assets. People place assets in trust for many different reasons. Some people set up trusts to keep assets out of probate before they are passed to beneficiaries. A probate is the costly and time-consuming process of settling the will of an individual. Other people set up trusts to protect assets from creditors. Assets held in trust are exempted from estate tax, making it a handy tool for individuals with estates worth over $5.64 million.
A trust can also be used to provide instructions and income for a family member in need, or to provide regular financial support to any heir or associate. The document can be tailored to accommodate specific terms, such as those indicating that beneficiaries receive assets or properties only if they meet certain requirements. Incentive trusts can be set up to attach strings to the inheritance of a child. Approximately 30 percent of people with high net worth set up trusts with conditions attached.
A trustee is the person or institution that supervises property and assets in a trust. The trustee is compensated for this work, which is one reason why complex trusts can be very expensive to set up and maintain.
Generally speaking, there are two primary types of trusts: living trusts and after-trusts, which may or may not be revocable. There are several sub-categories, which help grantors tailor trusts based on their requirements. Here is a look at the different types of trusts available:
- A revocable living trust is set up while the grantor is still alive, and the properties or assets are revocable. This means that they can be changed at the donor’s discretion.
- An irrevocable trust is a trust that cannot be changed after it is set up, but it comes with less tax. One type of irrevocable trust is the testamentary trust, which is effective after the grantor has died.
- An education trust is typically used to cover educational expenditures.
- A spendthrift trust is used when a beneficiary is not capable of making good financial decisions. The trustee usually decides the best way of spending the funds for the benefit of the beneficiary.
- A charitable trust is a type of irrevocable trust that is created for charitable purposes, in which properties and assets are given to one or more charitable organizations.
- A gift trust is typically used for transferring property as a gift. The trustee will distribute the assets to the beneficiary based on the terms outlined in the trust agreement. This option is best for people with assets totaling at least $100,000 because of its high management costs.
Having a trust fund offers some benefits, such as tax breaks, asset protection and prevention of probate in court after the death of a grantor. However, it is up to the individual to determine whether the benefits are worth the cost.