What Is A Trust?
When assets have been placed into a fiduciary relationship between a trustor and trustee for a designated beneficiary this is known as a trust or trust property. Assets can be anything such as cash, securities, real estate, or life insurance policies. Other names you may come across that refer to trust property are "trust assets" or "trust corpus".
To reduce tax liability trust property is usually merged into an estate planning strategy used to facilitate the transfer of assets. In the event of a bankruptcy or lawsuit, certain trusts can protect your assets.
In accordance with the trustor's wishes and in the beneficiary's best interests the trustee is required to manage the trust property. A trustee can be an individual or a financial institution such as a bank.
A trustor can also serve as a trustee managing assets for the benefit of another individual. Trustors are sometimes referred to as a "settlor" or "grantor."
Types of Trusts
There are several different types of trusts that can be established. However, usually trusts fall under two main categories. These types of common trusts are called revocable trusts and irrevocable trusts.
In a revocable arrangement, the trustor maintains legal ownership and control of trust assets. This would also mean that the trustor would be responsible for paying taxes on the income generated. In addition, this type of trust may also be subject to estate taxes, if its value exceeds the tax exempt threshold at the time of the grantor's death.
Regardless of the role a trustee plays, there are specific rules and laws that govern the trust established. The trust itself becomes the rightful owner of the assets once property has been transferred. For certain trusts, the assets can no longer be controlled or claimed by the previous owner, this is referred to as irrevocable trust.With an irrevocable trust, the trustor passes legal ownership of the trust assets to a trustee. However, this means those assets leave a person's property. What this does is lowers the taxable portion of the estate. The trustor also rescinds certain rights to mend the trust. For example, once a irrevocable trust has been established a trustor usually can't change beneficiaries. This is NOT the case with a revocable trust.
Regardless of the role a trustee plays, there are specific rules and laws that govern the trust established. The trust itself becomes the rightful owner of the assets once property has been transferred. For certain trusts, the assets can no longer be controlled or claimed by the previous owner, this is referred to as irrevocable trust.