Different Kinds of Trusts

The concept of a trust originated in the English legal system and is now widely recognized internationally. Trusts have considerable flexibility in the types of assets they can manage and how those assets can be disposed of. Once the legal threshold for the creation of a trust is met, trusts usually offer tax advantages and protection from creditors and other liability.

Identification

A trust is a legal arrangement whereby one person or group manages property for another. Real estate, cash or any other asset is entrusted by the grantor, who creates the trust. Most often, but not always, the beneficiary of the trust is a person other than the grantor. The manager of the assets in trust is the trustee, who operates under a fiduciary duty to the beneficiary. The possible structures of trusts vary widely, but a willing grantor, identifiable beneficiary, and specific property are the legal requirements for, and identifying marks of, a trust.

Function

The reason for creating a trust will largely determine the form it takes, and the flexibility of the trust structure allows for many applications. Trusts are commonly used for estate planning, where they administer a decedent's property privately without intervention of probate courts. Another common function of a trust is asset protection, since a trust distances assets from the grantor and makes it difficult for those assets to be subject to creditors. Trusts are also common within corporate structures, where they fill a number of roles including pension plans and employee compensation. Virtually all trusts have tax implications and, in some cases, tax avoidance is a motivating factor for the creation of a trust.

Types

The different kinds of trusts are too numerous to list, but several rate among the most common and important. Revocable living trusts are a popular substitute to a will, since they can be modified during a person's lifetime and simplify the estate administration process after death. Spendthrift trusts give a trustee authority to limit a beneficiary's access to funds due to their propensity to overspend, and are one of the rare instances where the grantor and beneficiary can be the same person. Discretionary trusts may have a similar result, since they give trustee broad authority to determine the best use of the trust assets. On the other end of the spectrum is the fixed trust, which is so detailed it gives very little if any real control to the trustee. An implied trust can be said to exist when the conditions for a trust are met, but no actual document executed.

Size

Any living person of sound mind can create a trust. In reality, however, trusts are usually only created by persons with significant assets, usually a million dollars or more. It may not be necessary or cost effective to create a trust to manage less, though anyone with real property concerned about the administration of their estate and seeking to avoid probate could benefit from a revocable living trust.

Considerations

While it's not always technically necessary to have an attorney when creating a trust there are numerous advantages to doing so. First, a competent attorney should be able to advise on the tax implications of different trust structures and stipulations. Using an attorney will likely produce a better agreement. Over and above that, however, keeping trust documents with an attorney makes it more likely the trust will be recognized by legal authorities, especially in the event of a trust designed to take effect after death.

Resources

• Trust Law
• Other Kinds of Trusts