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A trust is a type of legal agreement that permits a person or organization to keep and manage assets on behalf of another person or group of people. This person or organization is referred to as the trustee (called the beneficiaries). Estate planning, tax reduction, asset protection, charitable giving, and privacy are just a few of the many reasons why a trust could be established.
Three people are normally involved in a trust: the settlor (or grantor), who transfers assets to the trust; the trustee, who runs the trust in accordance with the settlor's directives; and the beneficiaries, who receive income or principal from the trust. A trustee or beneficiary of the trust can also be the original settlor.
There are different types of trusts depending on their characteristics and objectives. Some common examples are:
- Revocable trust: A trust that the settlor can change or dissolve at any time.
- Irrevocable trust: A trust that, once established, the settlor cannot alter or revoke.
- Living trust: A trust that is established and becomes effective while the settlor is still alive.
- Testamentary trust: A trust established by a will that becomes effective following the demise of the settlor.
- Inter vivos trust: A synonym for the living trust.
- Charitable trust: A trust whose main goal is to fulfill philanthropic purposes.
- Special needs trust: A trust created to meet the requirements of a beneficiary who is disabled while maintaining their eligibility for government assistance.
A trust can offer several advantages over other forms of asset ownership or transfer. Some of these are:
- Control: The settlor can name trustees and determine how and when the trust's assets will be transferred to the beneficiaries.
- Protection: The assets in the trust are typically shielded against creditors, lawsuits, divorce settlements, or probate bills of the settlor or beneficiaries.
- Taxation: For either the settlor or beneficiaries, the trust's nature and structure may result in a reduction of income tax, estate tax, gift tax, or generation-skipping transfer tax.
- Privacy: Unlike a will, the specifics of a trust are typically not made public.
However, trusts also have some drawbacks and limitations. Some of these are:
- Cost: Legal, accounting, filing, and trustee fees that are incurred during the creation and maintenance of a trust could eventually lower the value of the trust's assets.
- Complexity: It may be necessary to seek professional guidance and support while establishing and managing a trust, as well as to adhere to several laws and rules.
- Irrevocability: Certain trusts cannot be altered or canceled by the settlor after they have been created, regardless of how their circumstances change.
Consequently, before setting up a trust, you should speak with a lawyer, an accountant, or a financial planner who can assist you in understanding your alternatives and goals and designing a strategy that is suitable for your circumstances.
