A trust is a fiduciary arrangement in which, for the benefit of a third party, the beneficiary, another party, known as a trustee, grants a party, the trustee, the right to possess property or properties. Trusts are set up to provide legal security for the properties of the trustee, to ensure that those properties are allocated according to the trustee’s wishes, and to save time, minimise paperwork and, in certain cases, prevent or decrease inheritance or estate taxes. In finance, a trust can also be a kind of closed-end fund established as a limited public enterprise.

Understanding Trust

Trusts are established by settlers who determine whether to pass parts or all their properties to trustees (a person along with his or her lawyer). Such trustees keep the trust’s beneficiaries ‘ assets on hold. A trust’s rules depend on the conditions it was set up on. In certain cases, older beneficiaries will be eligible to become trustees. In some cases, for example, the grantor can be both a lifetime beneficiary and a trustee at the same time.

A trust can be used to decide how to handle and distribute a person’s money while that person is alive, or after death. A trust helps avoid probate and taxes. It can secure assets from creditors and can dictate to beneficiaries the terms of an inheritance. The drawbacks of trusts are that they need to build time and resources, and they can’t be quickly revoked.

A trust is one form of caring for a beneficiary who is underage or who has a mental condition that may affect his financial management capacity. If the receiver is deemed capable of managing his estate, he will receive the trust.

Categories of Trusts

Although there are many different types of trusts, each fit into one or more of the following categories:

Living or Testamentary

A living trust–also known as an inter-vivos trust–is a written contract in which the properties of an person are given as a trust for the use and benefit of the person during his lifetime. Upon the time of death of the person these properties are passed to the beneficiaries. The person has a successor trustee, who is responsible for the transfer of properties.

A testamentary trust, also known as a Will trust, determines how an individual’s properties are allocated after the person’s death.

Revocable or Irrevocable

The trustor may alter or terminate a revocable trust during his lifetime. An irrevocable trust, as the name suggests, is one that once formed cannot be reversed by the trustee, or one that is irrevocable upon his death.

Trusts to live can be revocable or irrevocable. Only irrevocable may be testamentary trusts. In general, it is more important to have an irrevocable confidence. The fact that it is unchangeable, including properties that have been permanently transferred out of the hands of the trustee, is what makes it possible to mitigate or stop any of the estate taxes.

Funded or Unfunded

In his lifetime, a funded trust has assets invested in it by the trustor. The unfunded trust consists only of the nonfunded confidence arrangement. Unfunded trusts may or may remain unfunded upon the death of the trustee. Considering that an unfunded trust exposes asset to many of the hazards that a trust is intended to prevent, it is necessary to ensure proper funding.