Basic Understanding of Trusts
A trust is a legal instrument that holds property for the benefit of one or more beneficiaries. The person who establishes the trust, known as the settlor, appoints an administrator who is obligated to distribute the trust assets in accordance with certain principles established by the settlor. Trusts can help you distribute your assets after death without going through probate, and can help you avoid estate tax.
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Trustees
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A trust is created when the settlor drafts and signs a formal trust document that specifies the assets that are contained in the trust; appoints a trustee to administer the trust; and names one or more beneficiaries. The trustee holds legal title to the trust assets, but his title is subject to the fiduciary duties of loyalty and care. He must use the trust assets according to the rules set out in the trust document and for the benefit of the beneficiaries only (except for any compensation provided for in the trust document). He must administer the trust assets with care and prudence and can be held civilly liable for failure to do so.
Testamentary Trusts
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Testamentary trusts are trusts that go into effect only after the death of the settlor. Many people find them convenient because the settlor can set conditions on the receipt of trust assets and can spread payments out over years instead of paying a lump sum. A settlor with a spendthrift relative, for example, can have the trustee pay out benefits in monthly installments so that the relative will not squander the assets. Testamentary trusts are subject to the jurisdiction of probate courts.
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Living Trusts
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A living trust is a trust that goes into effect while the settlor is still alive. A living trust can continue after the death of the settlor, however. If the settlor specifies in the trust document that the trust is revocable, he can change the terms of the trust during his lifetime or take all the undistributed assets back at some point. If he specifies that it is irrevocable, he loses the right to change its terms at any point. The assets of irrevocable trusts do not need to go through probate before being distributed to heirs. Furthermore, the trust assets are not subject to estate tax. A living trust will be treated as revocable unless you specifically state that it is irrevocable.
Modifying a Trust
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The terms of a revocable trust can be modified at any time by the settlor, as long as he is still alive. The terms of an irrevocable trust typically cannot be modified unless the trust's purpose cannot be effectuated without modifying its terms. In this case, a court will normally order the terms of the trust modified just enough to accomplish the settlor's original intentions.
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References
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