A common misconception is that trust funds are only for the uber-wealthy. On the contrary, trusts can help anyone with homes, businesses or large investments manage and protect their assets. Trusts can be funded during the grantor's lifetime or after his death. Depending on the circumstances, trusts can help individuals avoid excess taxes and legal fees associated with probate.
In their simplest form, trusts are funds that hold the assets of a person -- the grantor -- for the benefit of beneficiaries. Assets transferred into a trust are no longer owned by the grantor but by the trust itself. Trusts can be used to avoid taxes and legal fees and allow the grantor control over the distribution of assets. Every trust has a trustee that manages the trust assets and oversees distribution of property. A grantor can be the trustee of his own trust, or the trustee can be a friend, relative or financial institution.
There are a variety of types of trust, but all fall into one of two categories: a living trust or an after-death trust. After-death trusts, or testamentary trusts, are only funded after the grantor dies. These trusts are irrevocable, meaning that the terms and conditions of the trust can't be changed after the grantor's death. After-death trusts are considered to be a distinct legal and tax entity. Because of this, many individuals with particularly large estates use after-death trusts to avoid gift and estate taxes.
A living trust, also known as an inter vivos trust, is one that the grantor creates when he's still alive. Most living trusts are revocable trusts. That means the grantor can end the trust or remove trust property at any time. Living trusts are often used to avoid probate, a potentially time-consuming and expensive legal process after the grantor dies. Living trusts can be arranged so that property is distributed while the grantor is still alive or is only distributed after death.
Establishing Trust Terms
Grantors have a lot of flexibility in how they set trust terms and conditions. Grantors can specify which beneficiaries get which assets. They can control when the beneficiaries receive distributions from the trust and they can specify the amount. Grantors also can put certain conditions on beneficiaries before they can receive trust assets. For example, a trust could specify that a beneficiary can only receive distributions after he's graduated from college or that a certain lump sum can be taken out to pay for a home. Alternatively, the grantor can leave few conditions in the trust and give the trustee more flexibility in distributing assets.
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