Trusts are often considered to be a tool for the wealthy. But in reality, trusts are a great estate planning tool that can help you manage your assets during your life and ascertain that they are disbursed to your loved ones in a timely fashion after you are not here. Besides this, there are a variety of trusts that you can choose from depending on your requirements. Irrespective of the type of trust you choose, hiring an estate planning attorney is always a good idea to ensuring that the trust is set up in line with your requirements and objectives.
Trust is an asset management tool used for various reasons, from minimizing taxes to passing on wealth and estate to children and family. It is a powerful financial management tool. A trust is a three-party legal agreement in which the owner of the assets, known as the trustor or grantor, authorizes a third party, also known as a trustee, to control and hold the assets on behalf of a beneficiary or beneficiaries. You can use trusts to specify when, how, and what assets will pass on to your children or other members of the family. To better understand the tool, let’s take a closer look at all the parties involved in the setting up of a trust:
A grantor or trustor is the one who sets up the trust and transfers the assets to a third party. The grantor is also known as settlor, donor, or maker. More than one grantor or trustor can set up a trust to achieve a collective goal. A common example of a trust with multiple grantors is a charity trust. Generally, two or more people collectively combine and transfer their assets to set up a charitable trust.
The entity in charge of handling the assets of the trust is known as a trustee. In most states, the entity can be any person or organization legally entitled to own property. This means that the trustee can be a bank, a brokerage company, or a trust company. Trustees are responsible for fulfilling the legal duty, also known as fiduciary duty, to ensure the assets are utilized to achieve the objectives the trust was set up for. The trust agreement defines the legal obligations a trustee has to fulfill. Generally, the trustee has the right to buy, sell, transfer, or borrow against the assets of the trust.
As the term suggests, the people who benefit from the trust assets are called beneficiaries. The beneficiaries named in the trust agreement are entitled to receive the income and the principal amount of the assets that make the trust. There are three basic categories of beneficiaries:
Beneficiaries are not restricted to family members or other individuals. Non-profit organizations and charities can be named primary beneficiaries by grantors. The grantor decides who and what types of benefits the beneficiaries receive during the setting up of the trust.
The most common types of trusts are:
Living trusts are created by grantors when they are still alive. In this setup, the grantor becomes the trustee and controls the assets. The grantors typically chose a trustee successor who trusts when they lose the capacity or die. You can use a living trust to make future provisions for your healthcare. As the grantor of a living trust, you will also get the right to change the terms of the agreement throughout your lifetime.
This type of trust is also known as a trust under will. The trust is created through a will after the death of the grantor. Using this type of trust, you can secure a safe financial future for your children and spouse, preserve assets for children from a previous marriage, ensure the beneficiaries with special needs are cared for, or gift your assets to charities.
Revocable trusts are also called revocable living trusts. These trusts allow you to maintain control over the terms and conditions of your trust and can be dissolved if required. Revocable trusts are flexible and allow you to make changes to the terms and conditions throughout your lifetime.
These are trusts that cannot be changed once they are set up. So, if you transfer your property to a trustee under an irrevocable trust you cannot undo it. Although it is not as flexible as revocable trusts, it can be used as a safe haven to protect your assets from creditors, beneficiaries, and even Medicaid. Placing your assets under irrevocable trusts can also save you gift and estate tax.
After deciding the type of trust you want to set up and getting your finances and estate in order, you will need to follow two steps to set up a trust:
Drafting a trust agreement and handling all your assets can be tricky and complex. Hiring an estate planning attorney will simplify the process for you in the following ways:
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