What Is a Trust?
Trusts are legal agreements or contracts that allow third parties, known as “Trustees,” to hold assets on behalf of others, known as “Beneficiaries.
- Trustee – The trustee can be an individual, institution, or other legal entity. Assets are owned in the name of the trustee on behalf of the beneficiary. A trust can have one or more trustees. Trustee(s) have a responsibility to manage and distribute the assets as set forth in the terms of the trust.
- Beneficiary – The beneficiary is an individual or other legal entity for whom the trust assets are being held. There can be more than one beneficiary of a trust, and the beneficiaries of the trust may change over time, particularly upon the death of a beneficiary. The beneficiary may have certain rights to the income or principal (assets) of the trust, but the exact right to distributions is determined by the specific terms of the trust. The beneficiary may also have other rights which are determined by the terms of the trust.
Types of Trusts
There are many kinds of trusts, but essentially they fall into two categories:
- Living Trusts, also known as Revocable Trusts. Living Trusts allow the grantor, or the person creating the trust, to change the terms of the trust and to freely transfer assets in and out of the trust. In many ways the beneficiary can use and disburse the assets in the trust in much the same way as if they owned them outright. With a Living Trust, the trustee and the beneficiary are often the same person. Living Trusts are very useful estate planning tools; however, they offer little or no asset protection.
- Irrevocable Trusts. Irrevocable trusts come in a variety of “shapes and sizes,” but their common factor is that the grantor cannot change the terms of the trust. In addition, there are often limitations on the use and distribution of assets in the trust. Essentially, the grantor gives up all aspects of ownership of the trust assets. Irrevocable trusts are often used for asset protection, tax purposes, and protection or control of the beneficiary’s use or access to assets.