What is a Trust?

What is a Trust?

A Trust is a legal and enforceable contract between the Grantor, Trustee(s) and Beneficiaries. Five elements must exist in order for a trust to exist. These elements are a Grantor, Trust Agreement, Trustee, Trust Principal (Assets) and Beneficiaries. The following illustration details these elements.

ATC011-CHART-b

Trust are the most effective method to:

  1. Reduce and, in some cases, eliminate gift, estate and income taxes
  2. Preserve assets for the family
  3. Accomplish the desires of the family
  4. Provide asset protection
  5. Improve the quality of life by allowing use of trust assets by beneficiaries

Below is a brief summary of a trust.

A trust is a legal arrangement in which an individual or entity (trustee) holds property for the benefit of other persons (beneficiaries). There are many different kinds of trusts, which are detailed here.

The personal trust is the most common form of trust, created for non-business reasons for the benefit and protection of beneficiaries. As a general matter, interests in trust that are created for you by someone else are not subject to attachment by your creditors or the creditors of the person who created the trust. In many ways, the trust provides the ultimate protection against claims against property. Because legal ownership of the property is held by a trustee and the interests of the beneficiaries can be structured so that their interests are not assignable or attachable, it becomes impossible, as a practical matter, for someone to “con” the beneficiary into transferring his or her interest in the property. Trusts can also be used to ensure that funds are received by the beneficiaries at a specific time. For example, you can structure a trust with virtually absolute assurance that certain levels of money will be made available to your children or grandchildren as each reaches a certain age, such as 35 years, or when a certain event occurs, such as marriage.

Trusts can be used to ensure that the purpose for which the trust was designed is fulfilled. For example, you want to be assured that funds you have made available to pay for your child’s college education are used only for that purpose. If you give the money to the child, the child may well decide that purchasing a car, investing in a friend’s business, contributing the funds to a religious organization or some other worthy purpose is more important than using the funds to pay for a college education.

Trusts, by their nature, prevent the dissipation of property and tend to preserve ownership of assets. They tend to prevent compulsive decisions and can greatly reduce taxes and eliminate the claims of creditors, including that of a spouse in a divorce. No estate or financial plan is complete unless the use of trusts is considered to help achieve important goals.

The trustee in a personal trust acts in accordance with the law and the instructions set forth in the governing instrument by the person who created the trust. The primary responsibilities of the trustee are to manage and protect the assets in the trust for the best interest of the beneficiaries. The management and protection responsibilities include proper investment of assets, collection of income, maintenance of accurate books and records, filing of tax returns and other reports, and payment of income and trust property to the beneficiaries in accordance with the terms of the trust.