A trust is a fiduciary relationship in which one party, the trustor, grants the trustee the right to hold title to property or assets for the benefit of third party, the beneficiary.

What Is a Trust?

Trusts are created to provide legal protection for the trustor's assets, to ensure that those assets are distributed in accordance with the trustor's wishes, to save time, reduce paperwork, and, in some cases, to avoid or reduce inheritance or estate taxes. A trust can also be a type of closed-end fund established as a public limited company in finance.

A trust is a fiduciary relationship in which a trustor grants the trustee the right to hold property or assets for the benefit of a third party.

Trusts are extremely versatile instruments that can be used for a wide variety of purposes to achieve specific goals, despite their association with the idle rich.

There are six broad categories for trusts: living or testamentary, funded or unfunded, revocable or irrevocable.

Understanding About Trusts

Settlors (an individual and their attorney) establish trusts by deciding how to transfer some or all of their assets to trustees. These trustees safeguard the assets for the trust's beneficiaries. The rules of a trust are contingent on the terms upon which it was established. In some regions, older beneficiaries are able to serve as trustees. In some jurisdictions, for instance, the grantor can be both a lifetime beneficiary and a trustee.

A trust can be used to determine the management and distribution of a person's assets while they are alive or after their death. A trust assists in avoiding taxes and probate. It can shield assets from creditors and dictate the inheritance terms for beneficiaries. Trusts have the disadvantages of requiring time and money to establish and being difficult to revoke.

A trust is one way to provide for a minor or a person with a mental disability whose ability to manage finances may be impaired. Once the beneficiary is deemed competent to manage their assets, the trust will be transferred to them.

Classifications of Trusts

There are numerous types of trusts, but they all fall into one or more of the following categories:

Living or Testamentary

A living trust, also known as an inter-vivos trust, is a written document in which a person's assets are placed in trust for his or her use and benefit during their lifetime. These assets are transferred to their beneficiaries upon the decedent's passing. A successor trustee is the one who is in charge of transferring the individual's assets.

A testamentary trust, also known as a will trust, specifies the disposition of an individual's assets after death.

Revocable or Irrevocable

A revocable trust can be modified or terminated during the life of the grantor. As the name suggests, an irrevocable trust is one that the trustor cannot alter once it has been established, or that becomes irrevocable upon their death.

Trusts for the living can be revocable or irrevocable. Testamentary trusts are irrevocable only. Generally, an irrevocable trust is always preferable. Because it is irrevocable and contains assets that have been permanently removed from the trustor's possession, estate taxes can be minimized or entirely avoided.

Funded or Unfunded

A funded trust is one in which the trustor transfers assets during their lifetime. A trust with no funding consists only of the trust agreement. Unfunded trusts can be funded upon the death of the grantor, or they can remain unfunded. Due to the fact that an unfunded trust exposes assets to many of the risks a trust is intended to avoid, it is crucial to fund the trust properly.

Common Purposes for Trusts

The trust fund is an ancient instrument (dating back to feudalism) that is sometimes viewed with contempt because of its association with the idle wealthy (as in the pejorative "trust fund baby"). However, trusts are highly adaptable vehicles that can protect assets as well as direct them into the right hands in the present and in the future, long after the death of the original asset owner.

A trust is a legal entity that holds property, so the assets are typically safer than if they were held by a relative. Even a relative with the best intentions could be subject to a lawsuit, divorce, or other misfortune, thereby putting the assets at risk.

Despite the fact that they appear to be aimed primarily at high-net-worth individuals and families, because they can be costly to establish and maintain, those of middle-class means may also find them useful – for example, to ensure care for a physically or mentally disabled dependent.

Some individuals utilize trusts for privacy purposes only. In some jurisdictions, the terms of a will may be accessible to the general public. A trust may apply the same conditions as a will, and individuals who do not wish for their wills to be made public prefer trusts.

Additionally, trusts can be used for estate planning. Typically, the assets of a decedent are transferred to the surviving spouse and then divided equally among the surviving children. However, children under the age of 18 are required to have trustees. The trustees have authority over the assets only until the children attain adulthood.

Additionally, trusts can be used for tax planning. In some instances, the tax consequences of utilizing trusts are less than other alternatives. As a result, the use of trusts has become standard in individual and corporate tax planning.

The basis of assets in a trust is increased, which can result in substantial tax savings for the beneficiaries of the trust. In contrast, assets that are merely donated during the lifetime of the owner typically retain their original cost basis.

How does the calculation works?

Basis would be $10,000 for shares of stock that were initially purchased for $5,000 and are now worth $10,000 when inherited by a beneficiary of a trust. If the same recipient had received them as a gift while the original owner was still alive, their basis would have been $5,000. Later, if the shares were sold for $12,000, the person who did inherit them from a trust would owe tax on a $2,000 gain, whereas the person who received them as a gift would owe tax on a $7,000 gain. (Note that the basis increase applies to all inherited assets, not just those involving a trust.)

A person can finally establish a trust to qualify for Medicaid while retaining at least a portion of their wealth.

Types of Trust Funds

Listed below are some of the most prevalent types of trust funds:

Give Shelter Trust credit:

This trust, also known as a bypass trust or family trust, allows a person to leave an amount up to (but not exceeding) the estate-tax exemption. The remainder of the estate passes tax-free to a spouse. Even if the funds in a credit shelter trust grow, they will never be subject to estate taxes.

Generation Skipping Trust:

This trust enables a person to transfer assets tax-free to beneficiaries at least two generations younger than themselves, typically their grandchildren.

This trust removes a person's primary residence (or vacation home) from their taxable estate. This could be advantageous if the properties are expected to appreciate significantly.

Insurance Trust:

This irrevocable trust shelters a life insurance policy within a trust, thereby removing it from an estate's taxable value. While it is no longer possible to borrow against the policy or change beneficiaries, the proceeds can be used to cover final expenses.

Qualified Terminable Interest Property Trust:

This trust permits a person to allocate assets to specific beneficiaries (their heirs) at different times. In a typical scenario, a spouse will receive a lifetime income from the trust, with the remainder passing to the children upon the demise of the spouse.

Separate Share Trust:

This type of trust permits a parent to establish a trust with unique characteristics for each beneficiary (i.e., child).

A Spendthrift Trust:

This type of trust protects the assets placed in it from creditors. This trust also permits an independent trustee to manage the assets and prohibits the beneficiary from selling his interest in the trust.

Charitable Trust:

This trust is established for the benefit of a specific charity or non-profit organization. Typically, a charitable trust is created as part of an estate plan and aids in reducing or avoiding estate and gift taxes. A charitable remainder trust, which is established during a person's lifetime, pays income to designated beneficiaries (such as children or a spouse) for a specified period of time, and afterwards donates the remaining assets to the charity.

Special Needs Trust:

This trust is established for a dependent who receives government benefits, such as Social Security disability payments. The trust allows the disabled individual to receive income without jeopardizing or losing government benefits.

Blind Trust:

This type of trust allows the trustees to manage the trust's assets without the beneficiaries' knowledge. This could be advantageous if the recipient must avoid conflicts of interest.

Totten Trust:

This trust, also known as a payable-on-death account, is established during the life of the trustor, who also serves as trustee. Typically associated with bank accounts (physical property cannot be put into it). The major benefit is that the assets in the trust avoid probate upon the death of the trustor. Often referred to as a "poor man's trust," this type of trust does not require a written document and is often free to establish. It can be established simply by including identifying language in the account's title, such as "In Trust For," "Payable on Death to," or "As Trustee For."

With the possible exception of Totten trust, the trusts are complex vehicles. Setting up a trust correctly typically requires the assistance of a trust attorney or a trust company, which offers a variety of estate- and asset-management services, including the establishment of trust funds.

What Is the Benefit of an Irrevocable Trust?

By transferring assets to an irrevocable trust, you relinquish control and ownership. This denotes that they will not be considered as the part of your estate, allowing you to the minimize estate tax and avoiding the probate process after your death.

How Much the Trust Cost to Set Up?

A trust is a complex legal and financial entity that requires the assistance of an attorney to establish. Expenses are proportional to the complexity of the trust. Establishing a trust may costs between $1,000 to $1,500, for revocable trust may be around $3,000 and $5,000 for irrevocable trusts.

Who Controls the Trust?

The person who creates a trust is known as the trustor or grantor. The individual who oversees and administers the trust is known as the trustee. In a revocable trust, the trustor may also exercise control over the trust, whereas in an irrevocable trust, the trustee must be a third party. Beneficiaries of the trust are those who benefit from the trust, and the trustee is responsible for ensuring that the beneficiaries are paid.