Without a doubt, one of the most important components of estate planning is a trust. A trust is a legal entity that essentially holds onto financial assets and / or property for the person who creates the trust. Generally speaking, the purpose of holding these assets in a trust is to allow for those assets to be distributed to a beneficiary or beneficiaries outside of probate. However, this is not the only purpose that a trust can serve, which we will explore below.
Who Is Involved in a Trust?
Any trust will have three roles attached to it, and it’s important to understand what these roles are and how they differ from one another.
- Grantor: Also known as the settlor or donor, this is the person who has taken out the trust and whose property or financial assets the trust holds onto.
- Trustee: This is the person who is in charge of managing the trust. Because of this, this individual should be fully knowledgeable about how the trust works and what its purpose is.
- Beneficiary: Finally, this is the person who will receive the benefit of the trust, whether it is financial or otherwise.
While there are three roles attached to any trust, each of these roles does not need to be fulfilled by a different person. As a matter of fact, the same person can fill all three roles. How those roles will be filled ultimately depends upon the purpose of the trust, whether it is for estate planning or otherwise.
What Kinds of Trusts Are There?
There are both living trusts and after-death trusts. A living trust is one that is established while the grantor is alive. An after-death trust is one that is established after the grantor’s death, as part of a last will and testament’s terms. With respect to living trusts, there are two types of those: revocable and irrevocable. These are pretty much what they sound like. A revocable trust is one that can be changed by the grantor while he or she is alive, and an irrevocable trust is one that cannot be changed.
Beyond these basic categories, there are all kinds of trusts in existence. For example, there are special needs trusts, charitable trusts, life insurance trusts and many others. The kinds of trusts that people take out are largely dependent upon what their individual needs are, especially with respect to estate planning and taking care of dependents and spouses.
What Are the Purposes of a Trust?
Trusts can serve a wide variety of purposes. Commonly they are used to provide financial stability for individuals who have difficulty with their own financial matters, such as recently graduated college students. Trusts are commonly used in estate planning to reduce estate tax burdens after death as well, and they also provide the necessary liquid capital to pay such taxes. Finally, trusts are often an important component of last will and testaments, as they allow for assets and possessions to be distributed in private – a will in and of itself is a matter of public record, whereas a trust is not.
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