Understanding Trusts: Essential Legal Tools for Asset Management

A trust is an arrangement where property is transferred to a trusted third party, known as a trustee, by a grantor (or trustor). The trustee manages the property for the benefit of another party, called the beneficiary.

Example 1: Creating an Inter Vivos Trust

An inter vivos trust, or living trust, is established when a living individual transfers property to a trustee to manage for the benefit of specified beneficiaries. For instance, a business owner might create an inter vivos trust by transferring her warehouse to a trustee to benefit her children. This provides immediate control and management of the property as specified in the trust agreement, often offering certain tax benefits and protective measures against legal challenges.

Example 2: Establishing a Testamentary Trust

A testamentary trust is established upon the death of the trustor, according to provisions specified in their will. Imagine a father who leaves a trust outlined in his will to ensure that his estate – such as his house, investments, and other assets – is managed responsibly for his children’s benefit after his passing. This trust takes effect only upon his death and is devised as part of the estate planning process, ensuring that his children are appropriately taken care of according to his last wishes and reducing the potential for disputes over the inheritance.

Frequently Asked Questions

Q: What are the key benefits of establishing a trust?

A: Trusts offer numerous benefits, including avoiding probate, reducing estate taxes, controlling asset distribution, protecting assets from creditors, and providing for incapacitated beneficiaries.

Q: What is the difference between a revocable trust and an irrevocable trust?

A: A revocable trust allows the grantor to maintain control over the trust assets and make changes or terminate the trust during their lifetime. An irrevocable trust is permanent, where control is transferred away from the grantor and cannot be altered without the beneficiary’s consent.

Q: How is a trustee selected, and what are their responsibilities?

A: A trustee is selected by the grantor, usually based on trustworthiness and expertise in managing financial or property matters. The trustee’s responsibilities include managing the trust assets according to the terms of the trust agreement, making distributions to beneficiaries as specified, and ensuring that the trust complies with legal and tax requirements.

Q: Can a trust be contested?

A: Yes, trusts can be contested in court. Common reasons for contesting a trust include allegations of undue influence, fraud, lack of proper formalities, or the grantor lacking legal capacity when the trust was created.

Q: What’s the difference between a trust’s settlor and trustee?

A: The settlor, also known as the grantor or trustor, is the person who creates the trust and transfers the property to be managed. The trustee is the individual or entity responsible for managing the trust assets and executing the provisions laid out in the trust agreement.

Related Terms: Trustee, Grantor, Beneficiary, Estate Planning, Inter Vivos Trust, Testamentary Trust.