What is a Trust?
Trusts can be confusing because there are many different types of trusts, with many different purposes and names. In a general sense, however a trust is simply a contract or agreement that creates an ownership structure, and legal ownership of any asset you put into a trust is held for the benefit of a designated beneficiary. Within the trust document is a written set of rules that determine how, what, when, and where your assets are to be distributed. A basic trust consists of three parties necessary for creation; 1) the “trustor,” who initially grants assets into the trust and begins its creation; 2) the “trustee” or manager of the trust, who is responsible for making decisions about assets in the trust, and the 3) “beneficiary,” who receives the benefit of the trust’s assets.
Types of Trust
There are many different names for trusts that you may have heard, but trusts are classified in one of three ways and there are significant differences in how you can alter them:
- Living Trusts vs. Testamentary Trusts. A trust that becomes effective during the trustor’s lifetime is called a “living trust” and is generally created by a written instrument. On the other hand, a trust that is created under a Last Will and Testament is called a “testamentary trust”. A testamentary trust becomes effective only after the person who created it (the “testator”) dies, and it must be admitted to probate before it becomes effective.
- Revocable Trusts vs. Irrevocable Trusts. A “revocable trust” is a trust where the trustor can change any of the terms, and even cancel it in its entirety. A revocable living trust establishes the trustor as a beneficiary and allows the “trustor” to retain the right to alter or revoke the agreement. The original “trustor” is normally also the original “trustee,” and the revocable living trust allows the trustor the right to access the assets held in trust without restriction. A revocable living trust also has flow-through taxation, meaning that its assets are attributable to the trustor and taxed at the trustor’s individual level. (More complex trusts are taxed differently.) Revocable trusts are common forms of trust in Arizona. Many estates are created as revocable because the trustors are living and want to access their assets while they are still able to do so. If the trustor gives up the right to revoke or change the terms of the trust after it becomes effective, then the trust is an “irrevocable trust”. Many irrevocable trusts are created at the time of the trustor’s’ death, with terms that lock in the trustor’s’ intent so that beneficiaries and terms of distribution cannot be changed.
- Trusts Classified by Purpose. Every trust is established for a specific purpose and that purpose dictates the form and provisions of the trust. Some common trusts established for specific purposes include A/B Trusts, By-Pass Trusts, Credit Shelter Trusts, Charitable Trusts and Qualified Terminable Interest Property Trusts, among others.
Why Should I Put My Assets in a Trust?
Many people would rather not go through probate because court-supervised distribution of assets can be intrusive, costly, and time consuming. A trust avoids probate, and gives you peace of mind by letting you determine not only who receives money, but how and when the beneficiary will receive it. A trust protects your privacy by keeping your assets out of the public eye, but is also governed by law and allows for safe distribution. Trusts assist with those assets for which you have specific requests, allowing you to plan for taxes or protect your heirs.
Certain trusts can take advantage of tax elections that other planning methods such as a will cannot do, in order to save in estate taxes and/or income taxes. Many families also worry about their assets ending up in the wrong hands. An estate plan utilizing a trust can protect assets from undesirable claims from creditors even after you are gone. Through planning, you can create a framework that supports your loved ones, but that also helps to grow your wealth for them after you are gone. Trusts provide creative options for distribution, but many parents simply want to be sure that their eight-year-old child receives money to pay for health and education until the child is old enough to be responsible.
How Does a Trust Work?
Trusts avoid probate because they are private contracts that transfer ownership prior to your death, so that the court does not have to. A trust allows the“successor trustee” (the next in line after the original trustee) to immediately step in and access accounts and information, but only in accordance with the terms you’ve built into the trust. The successor trustee is a “fiduciary” (person entrusted with administration), with responsibilities and obligations that are governed by state law and by the terms of the trust itself. The terms of the trust specify distributions to the beneficiaries, and determine how the trust will be administered. Some trusts distribute assets upon death,while others provide protections that force the trust to “continue” until the protective provisions are satisfied. The great thing about a trust is the terms are yours, you create the trust and determine how you want it distributed.
Common Types of Trusts
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