Each person is a legal entity, and so is a trust. Because you and the trust are separate legal entities, anything you transfer from you to the trust becomes an asset of the trust. The trust then holds the assets for your benefit, or for the benefit of those whom you designate.
Why Have a Trust
- To manage assets in order to produce income for a beneficiary, conserve assets, or provide for the growth of the assets;
- To reduce or possibly eliminate estate taxes;
- To control the use and/or disposition of assets long after you have passed away;
- To provide for your spouse and/or your children;
- To provide for children during minority or if disabled; and
- To protect beneficiaries from claims by creditors.
- To protect assets in the event long-term care in a nursing home is required.
Components of a Trust
- Grantor: Creator of the trust.
- Beneficiary or Beneficiaries: Individual or individuals who receive the benefits (income and/or principal) of the trust. The grantor can also be a beneficiary.
- Assets: Items of economic value that are transferred to the trust.
- Trustee: Individual or entity that manages the trust's assets and distributes the assets according to terms established by the grantor. In most instances the grantor can also be the trustee, while the grantor is alive.
Living Trusts (Inter-vivos Trusts): Trusts that are set up and funded (even if nominally funded) during your lifetime.
Testamentary Trusts: Trusts that are incorporated into your Will, and thus court-approved (if necessary) after your death.
Revocable v. Irrevocable Trusts: Revocable trusts can be changed or revoked by the grantor. Irrevocable trusts cannot be changed after they are created.
Life Insurance Trusts: Life Insurance Trusts are used to transfer ownership of life insurance policies out of an individual’s taxable estate. This reduces the value of the estate subject to taxation, and thus, it reduces estate taxes. Life Insurance Trusts must be irrevocable. Therefore, the grantor may not assign the policy, cash in the policy, and/or change the beneficiary.
Special Needs Trusts: The purpose of a Special Needs Trust is to preserve public benefits for the beneficiary. Usually, someone other than the beneficiary funds the trust. These private funds are then used to supplement the beneficiary’s lifestyle, while still enabling the beneficiary to receive governmental assistance. The beneficiary has no right to revoke the trust or compel distributions for support and maintenance.