A trust is a legal arrangement which can be a very important tool for either a business or an individual. There are several different types of trusts that can be formed and they each have their own benefit. In order to understand the benefits of a trust, it is important to first understand exactly what it means legally. It is also important to know precisely how a trust works.
What is a Trust?
In its most basic definition, a trust is a legal arrangement through which one person agrees to holding money or property for another’s benefit. The trust is governed by particular rules which are outlined in the original agreement between the two parties. The trustee agrees to hold the property, usually money, according to those terms spelled out in the agreement. The trust will specify exactly what the trustee is expected and required to do with the money, or property. It will explain how long it is to be held, how it should be held and who is supposed to receive any benefits. The individual(s) who are entitled to collect the benefits of the trust is called the beneficiary.
Reasons for Establishing a Trust
There are some very common reasons that are behind the establishment of a trust. The person creating a trust can be a grantor, donor or a settler who determines where the money will be held, how it is to be spent or who it is to be given to. A trust is a useful tool through which provision can be made for family members or minor children who are either not experienced enough to handle financial matters or are incapable of handling them. Trusts may also be set up so that an individual’s personal assets can be taken care of if they become unable to take care of them themselves. Many individuals set up a trust as an estate planning tool. With an established trust the funds will not have to go through probate upon the individual’s death but they are immediately transferred to the beneficiary upon death. It may also provide a way to reduce the amount of taxes paid on an estate or it can provide liquid assets to help pay the taxes. One reason that a trust is typically referred over a will is that the terms of a will are made public, whereas the terms of a trust remain private.
Components of a Trust
Although there can be many different types of trusts, all of them will have some of the basic components. Someone, called the grantor, will have to create the trust and determine how the funds or property is to be handled; this party is called the trustee and they must agree to hold or handle the money or property for the other person’s benefit. The principal of the trust is the money or property that is likely to change, i.e. be spent or invested by the trustee as designated. Some of the principal will appreciate or depreciate in value. There must also be a beneficiary of the trust. It is possible in most cases to have more than one beneficiary, or beneficiaries. These four components are necessary for a trust to be created: grantor, trustee, money or property and beneficiary. No matter what the nature or purpose of the trust, it will necessitate these four components.
Types of Trusts
Trusts can be living or after death. The living trust is set up by a grantor and is active while they are still living; an after death trust is set up to go into effect in the event of the grantor’s death. Living trusts can be either irrevocable or revocable. The most common type of trust is a revocable (changeable) living trust.