Trust Basics

Whether you want to manage your own assets, control how your assets are distributed according to your death, or plan for incapacity, trusts can help you achieve your estate planning goals. Their power is in their versatility, many types of trusts exist, each designed for a particular purpose. Although trust law is complex and establishing a trust necessary to use an experienced attorney, mastering the basics are not difficult. 

What is a trust?

A trust is a legal entity that holds assets for the benefit of a second. Basically, it's like a container that holds money or property for a second. There are three parties in a trust arrangement: 

    For * Concessions (also known as a settler or trustor): The person (s) that create trust funds 

    * Beneficiary: The person (s) who receive benefits from the trust, such as income or right to use a home, and have what is called equitable title to trust property 

    * The trustee: The person (s) who has legal title to trust property, administers the trust and has a duty to act in the best interest of the beneficiary 

You create a trust by executing a legal document called a trust agreement. The trust agreement names the recipient and administrator, and contains instructions about what benefits the beneficiaries will receive what the manager's tasks are and when the trust will end, among other things. 

Funding a trust

You can put almost any type of asset in a trust, including cash, equities, bonds, insurance, real estate, and art. The assets you choose to put in a trust depends largely on your goals. For example, if you want the trust to generate income, you should put income-producing assets such as bonds, in your confidence. Or if you want your trust to establish a fund that can be used to pay estate taxes or provide your family upon your death, you can fund the trust with a life insurance. 

Types of trusts

There are many types of funds, the most basic may be withdrawn and irrevocable. The type of confidence you need depends on what you are trying to achieve. 

Living (revocable) trust 

A living trust is a trust you create while you're alive. 

A living trust:

    * Avoids probate court: In contrast to the property passes to heirs through your will, property that passes through a living trust are not subject to bankruptcy court to avoid delays of property transferred to your heirs and to keep matters private 

    * Maintain control: You can change the beneficiary, the trustee of any trust terms, move property in or out of trust, or even end confidence and get your property back at any time 

    * Protects against incapacity: If because of an illness or injury you can no longer handle your financial affairs, a successor trustee can step in and manage the trust property for you while you get better. In the absence of a living trust or other arrangement, your family have to ask the court to appoint a guardian to manage your property 

A living trust can also continue after your death, you can direct the trustee to hold trust property until the beneficiary reaches a certain age or get married for example. 

Warning: Despite the benefits that have living trusts some drawbacks. Property in a living trust is generally not protected from creditors, and you can not avoid estate taxes using a living trust. 

Irrevocable trusts

Unlike a living trust, you can not modify or terminate an irrevocable trust. You can not remove assets, change beneficiaries, or rewrite any of the conditions of the trust. Irrevocable trusts are often used to minimize estate taxes. The transfer may be subject to gift tax on the value of the property at the time of transfer but the property, plus any future assessment has been removed from your gross estate. That means your ultimate estate tax liability may be less, resulting in more property, which can go to your heirs. 

Tip: Each taxpayer has one million U.S. dollars lifetime exemption from the federal gift tax, so you can not actually pay taxes. You may owe state gift tax, although if you live in one of the handful of states that impose gift taxes. 

In addition, property transferred through an irrevocable trust will avoid probate court and may be protected from future creditors.