A trust is a legal process in which an individual transfers some or all of their assets to another party. This second party is then tasked with distributing that wealth amongst chosen beneficiaries. This allows people to manage their assets during life and even after death.
There are three parties involved in the definition of this kind of arrangement:
- The trustor/grantor: The founder and funder of the trust
- The trustee: The person or financial institution that manages the distribution of the trust fund
- The beneficiary: The person who receives the money or assets from the trust
This article looks at what trusts can do and why they can often be essential financial estate planning tools. We look at the most important details about these fiduciary arrangements and how you can set up your own trust.
Why Do People Create Trusts?
Trusts are a well-known form of wealth management. They are normally created to ensure that a person’s assets can be shared both in life and after death.
By appointing a trustee, the grantor of the arrangement can ensure that their funds and property are properly managed. They can then be distributed to their beneficiaries according to their wishes. The main reasons people enter these fiduciary relationships are as follows:
- Estate planning: To ensure your property and funds are easily available to your family if you become disabled or die.
- Maintaining privacy: Trusts are often not subject to probate, and therefore the contents of your estate won’t become a matter of public record at death.
- Planning a legacy: A trust is protected from your heir’s creditors and can provide structure to any beneficiaries who are unused to dealing with money.
Types of Trusts
There are many individual types of trusts available depending on the types of assets you want to secure for your future heirs and for your own necessities. However, all trusts broadly fall under one of two different categories:
- Testamentary trust: A testamentary trust is used to provide a plan for your assets after you die. Creating a trust like this can also be left as an instruction in your will to transfer your property to your heirs.
- Living trust: A living trust (which is also known as an inter-vivos trust) is created by a trustor to manage personal assets for their own or someone else’s benefit whilst they are still alive. On their death, the contents of the trust will be transferred to their chosen benefactors.
Revocable and Irrevocable Trusts
A key distinction between trusts is whether they are revocable or irrevocable. A revocable trust simply means that they can be amended by the trustor during their lifetime.
Irrevocable trusts on the other hand do not allow the same level of flexibility. These may not be changed once they have been set in place. However, they also offer the trustor a way to minimize estate taxes on their assets when they pass away.
The majority of trusts can either be revocable or irrevocable. However, testamentary trusts are always irrevocable.