What Is a Trust? How Does It Work?
A trust is a kind of estate planning instrument that is basically a connection established at the command of a person known as the Trustor or settlor. The trust instructs one or more persons, referred to as the trustee(s), to keep the Trustor’s property and to utilize and safeguard it for the benefit of others, referred to as the beneficiaries.
It may be established for a variety of reasons, including the trust’s financial advantage, financial assistance for minor children or a surviving spouse, or philanthropic purposes.
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Various Types of Trusts
Trusts come in a variety of shapes and sizes. All of them, however, fall into one of two categories: alive and testamentary. A living trust, also known as an inter-vivos trust, commences throughout the Trustor’s lifetime. A testamentary trust only transfers property into the trust when the Trustor dies and leaves a will. Prior to the establishment of a testamentary trust, the trust property must go through probate.
A revocable trust is one that is established while the Trustor is still alive. The trust becomes irreversible at the death of the Trustor. A revocable trust permits the Trustor to revoke or change the trust at any time without the requirement for anybody else’s permission.
Irrevocable Trust: An irrevocable trust may be established while the Trustor is still living, similar to a revocable trust. An irrevocable trust, on the other hand, differs from a revocable trust in that it cannot be canceled or amended by the Trustor without the approval of the beneficiary or beneficiaries once it is established.
Credit Shelter Trust: This type of trust can provide the Trustor with tax exemptions at both the federal and state levels. These advantages are only available to individuals who are very affluent and have fortunes in the multi-million dollar range. When married investors pass assets to their heirs, this trust permits them to avoid paying estate taxes. The trust is structured in such a way that the assets indicated in the trust agreement are transferred to the beneficiaries following the death of the investor. Another advantage of this trust is that the Trustor’s spouse retains rights to the trust assets and income generated for the rest of their lives.
A generation-skipping trust is a sort of trust arrangement in which the trust assets are handed down to the Trustor’s grandchildren rather than his or her children. This allows the Trustor’s children to avoid paying estate taxes if the assets were transferred to them directly.
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Qualified Personal Residence Trust (QPRT): A QPRT is a trust whose benefits include considerable property transfer cost savings. The QPRT is formed when a personal home is transferred to an irrevocable trust in which the Trustor maintains the right to remain in the house for a certain period of time.
Irrevocable Life Insurance Trust: This type of trust invests the proceeds of the Trustor’s life insurance policy and manages the trust for one or more beneficiaries after the Trustor’s death.
Qualified Terminable Interest Property Trust (QTIP): This kind of trust is set up to allow a trustor to grant their spouse a life estate in a property without having to pay federal gift tax on the transfer. The property recipient’s spouse has an income interest in the trust but no power of appointment over the principle.
You might be interested in reading:
- What is a Qualified Personal Residence Trust?
- What is an Irrevocable Life Insurance Trust (ILIT)?
- What is a Qualified Terminable Interest Property (QTIP) Trust?
A land trust is a private arrangement between two individuals. One party, the trustee, agrees to hold property in trust for the beneficiary’s benefit.
A charity trust is established for the benefit of a charitable organization. While these trusts are not tax-exempt, they are eligible for a charitable donation deduction under a particular clause of the IRS code. A charitable trust may be private or public, but it must fulfill the conditions for one of the exclusions to be designated as a public charity.
A secret trust is one that occurs when a property is bequeathed to a person via a will with the understanding that they would serve as the trustee of that property for the benefit of unnamed beneficiaries.
A totally hidden trust is one in which the will makes no reference to the trust’s existence and just mentions that the trustee will receive the property. A semi-secret trust is one in which the will directs the trustee to keep the property in trust but does not identify the trust’s conditions or beneficiaries.
Special Needs Trust: This trust is intended for beneficiaries who are physically or mentally impaired. The trust was established to allow the beneficiary to profit from the trust’s property or cash without jeopardizing their eligibility to collect government disability payments. This form of trust may also be established for the beneficiary if they are unable to manage their own finances due to a handicap.
A spendthrift trust is one in which an independent trustee has complete discretion over how the trust assets are spent for the benefit of a beneficiary who is financially irresponsible or in significant debt. The beneficiary’s creditors cannot access the monies in the trust, and the funds are not within the beneficiary’s control.
A Totten trust is established when the Trustor deposits money in a bank account or securities with instructions that the profits be transferred to the specified beneficiary upon their death. The account is maintained “in trust for the recipient,” according to the standard Totten trust terminology.
Discretionary Trust: A discretionary trust allows beneficiaries to receive specified, stated money from the trust in accordance with the trust’s precise instructions. A discretionary trust, similar to a spendthrift trust, is established for the benefit of a beneficiary who is unable to manage their finances responsibly, and the Trustor intends to safeguard the beneficiary’s assets while still providing for them.
A custodial trust is a trust fund, bank account, or brokerage account set up for a beneficiary but maintained in trust by a responsible party. This individual is referred to as a caretaker rather than a trustee. The custodian owes the beneficiary the same fiduciary obligation to manage the assets in the beneficiary’s best interests.
Crummey Trust: A Crummey trust permits a person to make lifelong gifts to an individual that are tax-free as long as the amount of the gift is equal to or less than the allowed value of $14,000 per individual and $28,000 per married couple, while also preserving the money in the trust. The beneficiary does not have immediate authority over the “gift” in the trust; rather, it is kept for the recipient’s benefit at a later period.
Bypass Trust: A bypass trust that cannot be revoked. When a settlor situates assets in a trust, the trust distributes income and principal to the surviving spouse for the rest of their lives. Under the Unlimited Marital Deduction, this transfer of assets to the bypass trust for the benefit of the spouse is tax-free. A bypass trust is only useful if the value of the estate exceeds the state’s existing estate tax exemption.
Asset Protection Trust: An asset protection trust allows monies to be kept in an unrestricted manner. These trusts may be set up to protect the beneficiary of the trust from estate taxes, divorce procedures, and bankruptcy. The assets are protected from creditors in this sort of trust.
Validity Requirements for a Trust
The process of establishing trust is quite straightforward. However, in order for the trust to be legitimate, the following conditions must be met:
When the trust was formed, the Trustor had to have meant to do so.
Trustee: A person must be appointed to manage the trust for the beneficiary’s benefit and to transfer the assets to the beneficiary. In the absence of a certain individual, the court may nominate someone.
Beneficiary: The trust must specify who will receive the assets of the trust.
The trust must have a stated goal that does not include the furtherance of illicit behavior.
Assets: There must be assets in the trust, such as money or property. There can not be trust if there are not any assets to put into it.
What Types of Assets Can Be Placed in a Trust?
One of the most pivotal aspects of a trust is that it holds assets. It is vital to remember that if the asset has a title, such as real estate or stocks and bonds, the asset’s title should be transferred to the trust’s name. Personal property, such as furniture, jewelry, and clothing, is not covered by title. These things may also be transferred to the trust by transferring your ownership rights to the trustee, who will hold them for the benefit of the trust’s specified beneficiaries.
Life insurance policies, retirement accounts, pension plans, and health savings accounts cannot be transferred to the trust since the beneficiaries identified in the individual policies govern the distribution of these goods. As a result, in order for the assets derived from these things to be put in trust, the specified beneficiary stated on this insurance must also be the trustee.
What Constitutes a Legitimate Beneficiary?
A trust may include anybody as a beneficiary as long as they are correctly designated in the trust agreement. The most common beneficiaries are spouses, children, grandkids, and friends. However, depending on the trust, pets, coworkers, strangers, or employees may be beneficiaries. A trust’s beneficiaries must be precise and certain. This implies that they must be verifiable at the moment the trust is established. A beneficiary’s description must be clear enough for the court to ascertain who they are with certainty.
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What Is a Successor Trustee and How Does It Work?
In most living trusts, the settlor appoints himself as the trust’s trustee for the duration of his life. In the case that the settlor becomes disabled or dies, a replacement trustee should be chosen. The replacement trustee must behave in the same way as the original trustee and has the same fiduciary responsibility to act in the beneficiaries best interests.
What is a Pour Over Will, and How Does It Work?
Before they die, many individuals forget to transfer part of their assets to their trust. A pour over will is a kind of will that is used in combination with a trust to address this issue. The will is termed as a pour over will because it “pours” the deceased’s property into the trust they established at the time of their death.
As a result, if an individual dies before transferring all of their assets to their trust, a pour over will assure that all of the assets are passed to the trust. A pour over will protect property outside of the trust from going through probate, which is something the Trustor was hoping to avoid when they set up the trust in the first place.
Obtaining Assistance from a Person You Can Trust
Whether you have a little or substantial estate, it is critical to consult with a trust lawyer when deciding how your assets should be divided. The financial ramifications and legal requirements associated with the validity of a will and trust are critical components in ensuring that your wealth is safeguarded. A lawyer in your area can advise you on the best ways to safeguard your assets for the benefit of your dependents and family.
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