What Is a Trust?
Let me explain what a trust is directly: it's a legal entity with its own rights, much like a person or a corporation. You, as the trustor, give another party—the trustee—the right to hold and manage your property or assets for the benefit of a third party, the beneficiary.
You set up trusts to protect your assets and ensure they're distributed as you wish. They can help your estate skip taxes and probate, shield assets from creditors, and set clear terms for how beneficiaries inherit.
How Trusts Work
You create a trust with an attorney's help, transferring your assets to a trustee who holds them for the beneficiaries. The rules come from the terms you set when building it.
Trusts determine how your money is managed and distributed while you're alive or after you die. They're useful for underage beneficiaries—you can hold assets until they're ready to manage them themselves.
Categories of Trusts
Trusts fit into broad categories: living or testamentary, revocable or irrevocable, funded or unfunded. A living trust lets you use your assets during your life, with the trustee handling distribution after your death. A testamentary trust activates only after you die, based on your will.
Revocable trusts can be changed by you anytime while you're alive; irrevocable ones can't. Irrevocable trusts minimize estate taxes by removing assets from your possession permanently. Funded trusts have assets added during your life; unfunded ones might get funded at death or stay empty, but funding is key to avoid risks.
Common Purposes for Trusts
Trusts date back to feudal times and aren't just for the wealthy—they're versatile for protecting and directing assets long after your death. You use them to keep assets safe from creditors or family members who might misuse them.
They secure funds for specific needs, like a beneficiary's education or business start. For beneficiary care, trusts help dependents with disabilities receive support without losing government benefits. They offer privacy since trust details aren't public like wills often are.
In estate planning, trusts pass assets to spouses and children, with trustees managing for minors. For taxes, they provide savings—revocable trusts get a step-up in basis for heirs, reducing capital gains taxes, while irrevocable ones use carryover basis but avoid estate taxes.
Types of Trust Funds
- Credit shelter trust: Bequeath up to the estate tax exemption to heirs, with the rest going tax-free to your spouse, keeping funds estate-tax-free even as they grow.
- Generation-skipping trust: Transfer assets tax-free to grandchildren or later generations.
- Qualified personal residence trust: Remove your home from your estate to handle appreciation without tax hits.
- Insurance trust: Shelter a life insurance policy from your taxable estate, using proceeds for estate costs.
- Qualified terminable interest property trust: Direct assets to beneficiaries at set times, like income to a spouse then remainder to children.
- Separate share trust: Set up different terms for each beneficiary in one trust.
- Spendthrift trust: Protect assets from creditors and prevent beneficiaries from selling their interest.
- Charitable trust: Benefit a charity, reducing estate and gift taxes, often dispersing income first then donating the rest.
- Special needs trust: Provide income to a disabled dependent without affecting government benefits.
- Blind trust: Let trustees manage assets without beneficiaries knowing details, avoiding conflicts.
- Totten trust: A simple payable-on-death account for bank funds, avoiding probate without a formal document.
Frequently Asked Questions
What is the benefit of an irrevocable trust? You give up control, so assets aren't part of your estate, minimizing taxes and avoiding probate.
How much does a trust cost to set up? Expect $1,000 to $3,000 for revocable ones; irrevocable are pricier based on complexity and location.
Who controls a trust? You as trustor set it up, the trustee manages it—you can be trustee in revocable trusts, but irrevocable require someone else.
The Bottom Line
Trusts are complex, except simple ones like Totten trusts. You typically need a trust attorney or company to set them up properly as part of estate management.
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