Trusts-How They Work And What They Do
Trust. Whenever you have a relationship with someone, you're trusting that the person in question will be honest and fair with you-whether you're making a purchase from a local merchant, hiring someone in your business, or simply dealing with family, friends, and neighbors on a regular basis. And, typically, in these types of relationships, you know that the word "trust" implies, both trusting others and being trusted yourself.
But when it comes to the word "trust" as used in financial-planning matters, many people are unfamiliar and inexperienced. They've probably heard the word used and they probably have a vague idea of what a trust does, but they're not sure how a trust fits into their financial picture. With this in mind, this article will attempt to take a closer look at trusts in general-what they are, how they work, and what they can do for you.
What Is a Trust?
Basically, a trust is a legal relationship in which you, as grantor (or creator of the trust), transfer property to a trustee (an institution, for example) for the benefit of one or more beneficiaries. The trust document, drafted by your attorney, sets forth your desires as to the duration of the trust, the powers and duties to be given the trustee, the time and manner of the distribution of the trust income and principal, and the rights of the beneficiaries. You give the trustee legal ownership of the trust property for the trust term. The trustee is legally bound to manage, invest, and disburse that property in the manner you describe in the trust document.
Types of Trusts
Put simply, there is no such thing as a standard trust. Instead, every trust is tailor-made to fit the financial needs and goals of the grantor. Trusts thus come in several varieties. For instance, a trust may be testamentary (created by the grantor under his or her will) or living (created by agreement during the grantor's lifetime). Furthermore, a living trust may be either a revocable trust (a trust which can be altered, amended, or even terminated-with all trust property returned to the grantor-at any time) or an irrevocable trust (a trust that cannot be changed).
In addition, a trust may be created for any number of beneficiaries (including the grantor himself) and may provide for just about any method of trust property distribution that the grantor desires. (Many grantors typically choose to provide that trust income be paid to one beneficiary for his or her life, with the remaining trust property to be paid to another beneficiary or beneficiaries when the income beneficiary dies.).
What a Trust Can Do for You
Trusts have many uses. For example, you can create a trust:
- As a "pourover" vehicle for your estate assets, designed to hold and manage your property for the benefit of your heirs after your death.
- As a receptacle for the life insurance proceeds to be collected upon your death.
- For the professional management of your investments, such as stocks and bonds, real estate, etc., during your lifetime.
- As a means of providing for your child's education or for the care of a handicapped dependent.
- For use in conjunction with your retirement planning.
- As protection against the mismanagement or nonmanagement of your assets in the event you become temporarily or permanently unable to manage them yourself.
- As a tax-savings device.