Information on Trusts
A trust is an estate planning mechanism that generally helps people avoid probate and, in very limited circumstances, can provide asset protection and tax reduction advantages. The owner of property can create a trust and then transfer property to the trust. In essence, a trust is a legal formality for enjoying the benefits of property ownership without personally owning the property.
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Types
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Legal trusts come in many varieties, including living trust, testamentary trusts, revocable trusts, irrevocable trusts, family trusts, charitable trusts and spendthrift trusts. A living trust is created during a person's lifetime, while a testamentary trust is created under a person's will. A revocable trust can be terminated or modified at any the trust creator at any time, but an irrevocable trust cannot. Family trusts help share the privileges and benefits of property with family members, while charitable trusts provide benefits to a certain charitable organization. Finally, spendthrift trusts allow the trust creator to provide limited, controlled support to another person who may not be responsible enough to handle a large lump sum payment.
Identification
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Despite the many varieties of trusts, each trust contains the same basic legal components. Most trusts are created by a written trust agreement which identifies the trustee, instructions to the trustee, the beneficiaries and the trust property. The trustee is the person or company appointed to invest, manage and distribute trust property. The beneficiaries are the individuals, companies or charities that receive trust distributions. The trust property is any property transferred to the trustee pursuant to the terms and conditions of the trust agreement.
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Probate
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Overwhelmingly, the most common and significant benefit of a trust is to help avoid probate of any property transferred to the trust. When each of us dies all of our property must be gathered and distributed, under the direction of a probate court, according to the instructions in our wills, or if we don't have a will, according to state law. However, this probate process only affects property that we personally own at the time of our death. Because property held in a trust is not personally owned, that property does not have to pass through probate. This probate-avoidance helps reduce costs and hassles for our surviving family members who otherwise would have to deal with the probate process.
Other Benefits
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In very rare circumstances, a trust can help protect property from creditors, reduce income taxes, or reduce estate and death taxes. Property held in an irrevocable spendthrift trust, for example, is generally protected from creditors until there is an actual distribution from the trust. Similarly, income earned on property owned by an irrevocable trust is not taxable to the trustor, but instead is taxable to the trust itself, which can result in income tax savings if the trust is in a lower income tax bracket than the trustor. If a trustor's net worth at the time of death is over $3,000,000, then a complicated type of trust can help minimize the federal estate tax or state death taxes, but the details are so complicated and change so frequently that realizing this benefit requires the help of experienced estate planning consultants.
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References
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