TRUSTS
A trust is an arrangement where a party consents to hold assets for the benefit of another party. People create informal trusts quite often. For instance, when a parent leaves a babysitter an amount of money to hold on and use in case an emergency arises they have created a trust.
Formal trusts work in the same way but they are governed by laws and regulations that are laid out in the laws of each state. Formal trusts may comply with certain requirements and conditions in order to be recognized and protected by law.
COMPONENTS OF A TRUST
Trust must satisfy four components:
1. Trustor - The trust must be created by someone who is referred to as the trustor, grantor, donor or settlor.
2. Trustee - Another person or entity must consent to hold money or other asset for the benefit of the trustor, this is the trustee and there can be more than one. It may also be a person or corporation that has trust powers such as a bank.
3. Trust Fund - There must be money or other asset to be held in trust by a trustee for the benefit of a trustor. The asset is referred to as the principal or corpus of the trust. The principal or corpus of the trust never remains the same. A portion of it is spent by the trustee, another portion is invested to earn interest and dividends and some of it may gain or lose value. The total of money and assets put in trust are called a trust fund.
4. Beneficiary - Trusts must also benefit someone and this person is referred to as the beneficiary of the trust. There can be more than one beneficiary in which case there would be beneficiaries.
SAME COMPONENTS, DIFFERENT PURPOSES
While every trust must have these four components, they differ in the assets they hold in trust, they are created for different purposes and they are created through different purposes. These are the differences that enable the creation of various different types of trusts.
CLASSIFICATION OF TRUSTS
Trusts can be classified in different ways. One way to classify them is according to when they become effective which can be between during the lifetime of the grantor or upon their demise. This gives rise to the classification of living trusts vs. testamentary trusts. One that is effective during the lifetime of the grantor is known as a living trust while one that is affected when the grantor passes on and is created as a last will and testament is known as a testamentary trust.
Revocable and irrevocable trusts are another classification. With the former, the grantor holds the right to revoke a trust after they have affected it as well the right to change its terms or provisions. Making changes is not provided for with an irrevocable trust.
CLASSIFICATION BY PURPOSE
A third kind of classification is one that is the purpose of a trust. A trust has income and estate tax laws that apply. A common goal of starting a trust is to benefit from the income and tax benefits as provided in the tax laws. Certain provisions and terms must be included in a trust to be able to enjoy this benefit. It is therefore important to be clear on the purpose of a trust and set up one that will serves your goals.
COMMON TYPES OF TRUSTS BY PURPOSE
- A/B Trust - This type is separated into two distinct trusts when the grantor passes away. The split creates a Credit Shelter trust whose purpose is to shield as much of the grantor's assets as possible from federal estate tax thanks to the virtue of unified create. It also creates a marital tax that is created to shelter remaining assets from the same tax on the virtue of unlimited marital deduction.
- Asset Protection Trust - This trust is created to protect assets from creditors’ claims. Such a trust can be a Domestic Asset Protection trust or a Foreign Asset Protection trust. Both types are also known as Self-Settled Spendthrift Trusts. This trust is always an irrevocable living trust.
- Charitable Trust - This trust names one or more charitable beneficiaries. If correctly instituted under federal tax laws, it entitles a grantor to deduct some of the donated funds of a charitable trust as a charitable income tax current deduction. Other tax benefits are also provided for. There are four types of this trust.
THE POWER OF A TRUST
These are just a few examples of trusts that can be created for different lessons. They benefit anyone with the minimal amounts to invest and these amounts are quite fair. They benefit and protect one's loved ones and charities while one is still alive and after. They also shelter and grow assets through tax benefits.
