What is a Trust?
This article address the trust definition and other trust-related topics.
- Trust Definition: When someone owns something, that item it is called an asset, and a trust is a pool of assets available at a specified time for a specific group known as the “beneficiary”, because they benefit from the trust. A trust can be available to the beneficiary while the creator of the trust is still living, or available only after the creator has passed away.
- Who is involved? There usually are three parties involved in a trust:
- The creator or grantor – creates trust
- The trustee – in charge of maintenance and distribution of assets
- The beneficiary – receives benefit from trust through assets
- The creator, trustee and beneficiary can be the same person or party. A common trust consists of the grantor creating the trust, naming his/herself the trustee, and naming the beneficiaries as his/her children or grandchildren. When a trustee passes away, he/she is succeeded by an assigned person to be the new trustee. This is part of the trust definition.
- Types:
- Revocable: This trust can be revised by the creator without beneficiaries knowledge or consent. Assets are available to beneficiaries after the death of the trust’s creator.
- Irrevocable: This trust cannot be revised by the creator without the permission or consent of beneficiaries. There are tax benefits to this kind of trust, namely nontaxable assets or estate upon the death of the creator.
- Qualified Terminable Interest Property: This trust is simple in nature: to provide one’s spouse (usually the creator’s spouse) the assets of the trust after the creator’s death. This trust allows the creator to transfer the assets to his/her spouse federal gift-tax free.
- Special Needs Trust: This trust is specifically designed to help those with special needs, unable to provide for themselves, or the incapacitated. This trust also has tax benefits, meaning the government will have a hard time taxing this trust after the creator dies.
- Blind Trust: This trust provides the creator privacy and anonymity. For example, a parent might create a trust for his/her children and restrict the amount of money and the words inside the trust to his eyes only. The children still receive the specified funds after the death of the parent, but they only see how much he/she receives, not the total amount in the trust or the documented words.
- Testamentary Trust: This trust is created by an executor upon the request in a deceased person’s will. For example, per written request, an executor will create a testamentary trust after the creator of the will dies.
- What is the difference between a (living) Trust and a Will?
- The difference between a living trust and a will are:
- Trusts avoid probate (in most cases)
- Trusts maintain privacy post-death
- Wills have an executor to be in charge of assets post-death
- Wills name those who will be guardians over minors
- Wills are less complex than trusts
- Some similarities of a living trust and a will are that both:
- Have beneficiaries to receive assets
- Transfer assets to children
- Allow the revision of document
- Common Trust Problems and how to prevent them:
- Tax-related problems: If the trust is not written with the correct ‘conduit’ or accumulation’ trust language, the government can find ways to tax the trust all at once, instead of overtime.
- Missing terms for Special Needs beneficiaries: Beneficiaries in some trusts have special needs. If they are not noted as special needs in the trust, the consequences could be the delay or restriction of funds being transferred.
- Power of Attorney: A power of attorney is someone who will act on one’s behalf in the event they become unable to speak and for themselves. In the event a person becomes incapacitated, failure to notify the power of attorney may result in them being the care of someone they may not know or trust.
- Unclear directions for Future Trustees: A common problem with trusts is not stating the clear directions for either a power of attorney or a future trustee. In many cases, the creator of the trust dies, and the next trustee is in charge. However, the directions on how to handle, maintain and distribute assets in the trust are unclear or indirect, creating frustration and confusion.
- Why have a Trust? A trust can improve wealth, maintain or organize assets, and help the distribution of those assets to be smooth after the death of the creator/grantor. Having a trust can be beneficial to not only the wealth of the beneficiary(s), but to the wealth of those in charge of the trust after the grantor dies.
Interesting Cases: There have been many cases where a trust is either indirect, unclear, or nonexistent. In these cases, there is much confusion, frustration and even fighting over the assets. In the case of Leona Helmsley, her trust included a will that stated her two grandchildren would not receive any assets, and that her assets (mostly money) would go to charity and her dog. Because of the fogginess of the trust and will, there was much confusion as to where the assets were being transferred. Apparently, in her will, Leona’s dog was to receive $12 million dollars, instead of leaving her grandchildren the money. After a lengthy court trial, the grandchildren both received a fair amount from the trust. For more information about the trust definition including additional information about trusts, click here.
