- October 26, 2021
- Posted by: Virg Cristobal
- Category: Finance
What is a trust and what is the main purpose of a trust?
A trust is established to provide legal protection for the trustor’s assets and to make sure that those assets are distributed according to the wishes of the trustor. Trusts are a fiduciary relationship in which one party also known as the trustor, gives another party, the trustee, the right to hold title to property or assets for the benefit of the third party also known as the beneficiary.
While trust is typically associated with the wealthy, it can be highly versatile instruments used for a variety of purposes to achieve specific goals. While there are six different categories of trusts, they really only fall into four main types. The six types include living or testamentary, funded or unfunded, revocable or irrevocable.
The four types of trusts.
The four main types of trusts are living, testamentary, revocable, and irrevocable.
Living trust – a living trust is also called an inter vivos trust, obviously created while you’re still alive. The purpose of a living trust is for the transfer of assets to beneficiaries avoiding probate, the court proceedings for disturbing assets after death.
Testamentary trust – this type of trust is set up after death according to your last will and testament. The terms of a testamentary trust established in the will to be followed after the death and can be changed at any time up until the death and are typically more flexible than a living trust.
Revocable trust – this type of trust is a living trust because it is created when the trustor is still alive and it is designed to bypass probate for the transfer of assets after death. While this is still a living trust, living trusts can be revocable or irrevocable.
Irrevocable trust – this trust cannot be altered after the trust is created. The reason a trust might be irrevocable is to transfer assets out of taxable estates and income from the assets can no longer be taxable to the benefactor during their lifetime and the assets are not taxable to the state upon the death of the benefactor.
The main difference between a funded and an unfunded trust is then a funded trust puts assets into the trust during the trustor’s lifetime when an unfunded trust consists of only the trust agreement with no funding. These unfunded trusts can become funded upon the trustor’s death or simply remain unfunded.
Should young people consider a trust for assets and property?
A trust can be formed when someone is concerned about the incapacity or once their assets to be transferred to beneficiaries in a particular manner. A trust is a neutral entity. It’s part of the basic estate planning where funds and assets can be set aside to take care of minors, property, or any other type of assets, personal property, or people.
The main difference between a trust and a will is when wealth is passed to a subsequent generation. It’s important to have a will and a trust. While the will is a written document expressing the deceased person’s wishes a trust is where that person would give another party authority to handle assets for the benefit of a third party or other beneficiaries.
A trust can be set up for sticky situations where there may be major fallouts to the distribution of funds or assets after someone passes away. If there are many disputes or minors involved that need to obtain finances and assets at a certain age after the trustor passes on, a trust can be a vital part for protection and preservation.
It really is to ensure the trustor’s resources are preserved, manage, and spent in line with their wishes while they are under the care of a loved one or health professional or even after they pass on. This doesn’t necessarily have to mean death either. If the trustor has a stroke, dementia, or faces Alzheimer’s disease and cannot coherently manage their finances anymore, a trust set up ahead of time will handle all of the decision-making issues at the request of the trustor when they were competent.
Disadvantages to a trust.
While there really are no disadvantages to a trust, they can be more of a trade-off and a trust may not be the best solution for a particular person. The trust can be more expensive and complicated than a will but in the right situation, a trust is protective and really the best option for many situations. It’s important to sit down with an estate planner to determine the best course of action between a will and a trust or even both.
How Much Money Do You Need to Set up a Trust?
A good rule of thumb is if you have a net worth of at least $100,000 and have a substantial amount of assets in real estate or other valuable items and you have specific instructions on how and when you want your estate to be distributed, a trust is a good option. For more information on devising and planning out a will or a trust, contact Chrome Advisors today.
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