What is a 'Trust'
A trust is a fiduciary relationship in which one party, known as a trustor, gives another party, the trustee, the right to hold title to property or assets for the benefit of a third party, the beneficiary. In finance, it can also be a type of closed-end collective investment fund built as a public limited company.
BREAKING DOWN 'Trust'Trusts are created by settlors who decide how to transfer parts or all of their assets to trustees. These trustees hold on to the assets for the beneficiaries of the trust. The rules of a trust depends on the terms under which it was built on. In some areas, it is possible for older beneficiaries to become trustees. For example, in some jurisdictions, the grantor can be a lifetime beneficiary and a trustee at the same time.
There are two types of trusts: the living trust and the testamentary trust.
A living trust – also called the revocable trust or the inter vivos – is a written document in which an individual's assets are provided as a trust for the individual's use and benefit during his lifetime. These assets are transferred to his beneficiaries at the time of the individual's death. The individual has a successor trustee who is in charge of transferring the assets.
A testamentary trust, also called a will trust, specifies how the assets of an individual are designated. This document arises at the time of the testator's death.
Common Purposes for Trusts
Some individuals use trusts simply for privacy. The terms of a will may be public in some jurisdictions. The same conditions of a will may apply through a trust. Individuals who don't want their wills publicly posted opt for trusts instead.
Trusts can also be used for estate planning. Typically, the assets of a deceased individual are passed to the spouse and then equally divided to the surviving children. However, children who are under the legal age of 18 need to have trustees. The trustees only have control over the assets until the children reach adulthood.
Trusts can also be used for tax planning. The taxes relating to trusts are typically different compared to achieving the same thing through another route. In some cases, the tax consequences provided by using trusts are lower compared to other alternatives. As such, the usage of trusts has become a staple in tax planning for individuals and corporations.