What Are Trusts in the Financial World?

Trusts are sometimes used to maintain privacy by hiding the owner's identity.

A financial trust is a legal entity just like a person is a legal entity. Since your trust is a separate legal entity than you, money placed in a trust account is legally separated from you. This is important, because it means any assets you transfer to a trust becomes property of the trust. A trust holds the property for either your benefit or for the benefit of anyone you decide to designate it to.

Roles and Components

Each trust has four separate components. The person who creates a trust is the grantor. The person or entity that receives benefits from the trust is the beneficiary. Keep in mind that the grantor and the beneficiary can potentially be the same person. Each trust has assets, which can include financial securities, property or businesses. Finally, each trust has a manager, called a trustee. The trustee can also be the grantor and beneficiary.

Types

There are two basic types of trusts. A living trust is established while the grantor is alive. A testamentary trust is established from a grantor's will after she dies. In addition, trusts can be either revocable or irrevocable. If a trust is revocable, the grantor has the right to change the terms or cancel it at any time. Contrarily, an irrevocable trust is permanent and cannot be changed or ended.

Purpose

Trusts are used for many different purposes. One of the main reasons a trust is established is to allow someone else to manage your assets in the case you become incapacitated. A trust can also be established in order to give money or property to relatives or a charity when you die. Many times assets can be tied up for years in probate court after you die. A trust allows your heirs to bypass this problem.

Taxes

Trusts can also be used to eliminate some or all estate taxes for your heirs. A credit-shelter trust, for example, is sometimes used to pass assets on to your children or someone else you specify. However, the assets will remain under control of your spouse until she also dies. This strategy can bypass the need for your spouse to pay all or most estate taxes.

References

• Lawers.com: Trust Basics
• Lectric Law Library: What is a Trust?