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Trust is a legal term, but do you know what a trust is? Find out more.
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:
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.