A trust is an arrangement for an orderly transfer of property from one person transferring the property (grantor) to designated beneficiaries. The property may be real, tangible, or intangible. A trust is created by a grantor, who entrusts someone (a trustee) to distribute a property to the grantor's beneficiaries in accordance with trust agreement. A trust is a legal document which is a very commonly used technique for estate planning (orderly wealth transfer once grantor dies).
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The trust is governed by the terms of the trust document, which is usually drafted by an estate attorney. It is also governed by the local laws. The trustee is obliged to administer the trust in accordance with both the terms of the trust document and the governing law.
The person creating a revocable trust (grantor) retains the right to alter it or its beneficiaries at any time. A revocable trust is also known by the names of: 'grantor trust', 'living trust', and 'inter vivos'. You don't need to reference a trust in your will. You can not change the beneficiary of a trust via will because a trust is an independent legal entity. Trust is a tool to implement now what you would like to implement after your death. Once the person creating a revocable trust dies, a revocable trust becomes an irrevocable trust i.e. no change can be made to its terms e.g. beneficiary, how assets are invested, or are distributed among a set of beneficiaries.
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Note that if you put any appreciating assets or income producing assets in this trust, any capital gain or income from these assets is taxable to the person setting up this trust (Grantor). Grantor can make himself the 'trustee' too.Aside from taxes, a revocable trust offers two key benefits:
a. A private transfer of assets. An asset transfer via a trust arrangement is a private affair. On the other hand, if an asset is transferred via a will, everyone gets to know because the assets in a will go through the probate process involving court proceedings. Additionally, the transfer of property via a will could take much longer.
b. Better management of assets after death. The asset transfer does not have to be immediately after death. The terms and conditions of the trust allows you to manage the transfer of assets in the same way as if you were alive.
As the name indicates, an irrevocable trust is the trust that can not be revoked. That means if you have setup an irrevocable trust, you can not alter it or its beneficiaries. In other words you don't have any 'control' on this trust. Because you don't have any control on the assets, once transferred to an irrevocable trust, any capital gain or income from the trust assets is not taxable to the grantor (person setting up the trust). As a result, an irrevocable trust offers a useful tax efficient wealth transfer tool. Some key benefits of an irrevocable trust include:...
While a 'will' is a minimum requirement for protecting the interests of your dependents in case something happens to you, setting up a trust is a much better approach to plan for any unforeseen event. If you have minor children (under 18 or 21 depending on the state) and your will doesn't have specific provisions on how the money will be spent for the benefit of your children, a court will appoint a guardian to manage your assets and to pay for your children's needs until they turn major. A court appointed guardian may not have the same value system as yours, and the court approval process for paying for your children's needs could make the process worse.
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As we all know, most people at the age of 18 or 21 are not very money savvy. So, it makes sense to list important things where the money needs to be spent. For example, you could include a provision for private education, down payment on a home etc. Setting up a trust requires an estate attorney who may charge anywhere from $1,000 to $3,000 for setting up a trust. So, if the amount left is not substantial, you may want to just use your will to handle this. A trustee, whether a corporate trustee (generally a bank or some other financial institution) or an individual, is generally held to a higher standard of care as compared to a custodian of your will. A trustee is required to follow the trust requirements prudently. If not, the trustee could potentially be sued by beneficiaries for mismanaging the trust. If you decide to set up a trust for your children, here are a few key planning ideas to consider....
A Qualified Terminal Interest Property (QTIP) trust is an effective mechanism to manage the transfer of wealth if you have children from an ex-spouse. Under this trust, the surviving spouse gets a lifetime income while the remainder can go to the children from previous marriage. This income must be distributed to the surviving spouse at least once a year. However, the assets of QTIP trust are included in the estate of the person setting up this trust.
A QPRT (Qualified Personal Residence Trust) is a trust that is set up by someone (grantor) to transfer the ownership of either a personal residence or a vacation home to children or other beneficiaries. As the name indicates, a QPRT applies to a residence only. A QPRT can also allow you to retain the right to stay in the house for a fixed period of time. This is a tax efficient transaction because at the time of transfer, your property is valued at market price less the discount for any rent this property would earn for the duration of the term. By making this arrangement, you get the appreciation of property out of your estate. It is even more attractive during a housing market downturn because house prices are low. But a key requirement is, you must outlive the term of QPRT otherwise there is no tax advantage. The other disadvantage could be that after the term of QPRT, your beneficiaries may not let you live in this house and you may not have any other option....
Before setting up a QPRT, you need to think about your personal situation from a few different angles (not applicable in the year 2010):
