Trust
It is a fiduciary relationship between two parties. One of the parties, the trustor, grants the other
party, a trustee, the right of a specific asset or property for the welfare of a third party, i.e. the
beneficiary. Trusts provide legal protection to the assets of the trustor. It ensures that the assets
are distributed according to the wish of the trustee only.
What is Trust?
Trust, the fiduciary relationship between a trustor and trustee, is created by any settler with its
lawyer. The settler will decide the method of transferring the assets. Either the whole or some
parts of an asset get transferred. The guidelines and rules for any trust depend upon the
conditions and terms on which it was built. It helps determine the method of distributing money
to a person during his life or after his death. Moreover, they also help in avoiding taxes.
However, it takes significant time and money to create it.
Trust can be one of the best ways to provide an underage beneficiary or someone with an
unsound mind. When the beneficiary of the trust can handle the assets, they shall inherit them
according to the guidelines of the faith.
Categories under which the trust falls
There are many types of trusts; however, all of them fall under any of the following categories:
Living Trust: The living trust is transferred to the beneficiaries only after the trustor's death. The
trustee is responsible for transferring these assets to the beneficiaries.
Testamentary Trust: The trust that tells the way of the method of distribution of any trust after
the individual's death is the testamentary trust.
Revocable Trust: The trusts that the trustor can alter or terminate during his lifetime are the
revocable trust. Living trusts can be one example of revocable trusts.
Irrevocable Trust: The trusts which can't be altered or terminated after establishment are
irrevocable. These are preferable to the revocable trust. An example of irrevocable trust is
Testamentary trust.
Funded or Unfunded Trust: If the trustor puts the assets during his lifetime is the funded trust.
On the other hand, the unfunded trust becomes funded after the trustor's death and is only
based on the trust agreement without funding during the lifetime of the trustor.
Advantages of Trust
Some of the primary advantages of a trust are as follows:
It can help defend the assets against any illegal claims.
The agreement of trusts prevents any fraud by the creditors.
It also reduces the inheritance tax in the jurisdiction of the settlor.
It reduces tax on the income and capital too.
Types of Trusts
Some of these types of trusts are as follows:
Generation-Skipping Trusts: As the name suggests, a generation-skipping trust involves the
transfer of assets by skipping a generation and, for example, transferring your asset to your
grandchildren.
Separate Share Trust: The trust enables the parents to build distinct features for each
beneficiary, i.e. their children.
Charitable Trust: The trust established for the benefit of any non-profit organization or charity is
the charitable trust. The assets after the trustor's death are transferred to charity by a trustee.
The charitable remainder trusts distribute the assets in the charity after designating some of
them to the beneficiaries. For example, A trustor will fund the trust during his lifetime. And after
his death, some of the assets will be distributed among his family and the remaining for charity.
Spendthrift Trust: This type of trust does not allow the beneficiaries to trade their interests in this
trust. Thus, it provides complete protection against the creditors until the assets or properties
are entirely distributed amongst the beneficiaries, as mentioned in the agreement.
What is the definition of trust?
According to the trust definition, it is a legal agreement or a fiduciary relationship between two
parties in which the third party, i.e. the beneficiary, gets the benefit. The trustor is the person
who willingly transfers their assets or properties, and a trustee is the second person who
performs this transfer.
What are the basic categories of trusts?
The basic categories under which the trust falls are as follows:
Living or Testamentary Trust
Funded or Unfunded Trust
Revocable or Irrevocable Trust
State the advantage of an irrevocable trust?
Irrevocable trust cannot be altered or terminated once established. Thus, giving up a specific
part of your property in an irrevocable trust helps you minimize the estate tax. It also reduces
the probate process after the death of the trustor.
State some of the points, to keep in mind while establishing a trust?
Some of the points to keep in mind while establishing a trust are as follows:
Always define the beneficiary clearly. There should be no loophole while describing your
beneficiary.
It is always not advisable to opt for the beneficiary as the trustee too.
Remember that any private trust will reach its termination period after 25 years.
