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What is a Trust?

An Introduction to Trusts

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What is a Trust?
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A trust is a legal agreement that has three parties to it:

  • Trustmaker - The person who creates the trust agreement, also commonly referred to as the Grantor, Trustor or Settlor.
     
  • Trustee - The person or entity responsible for managing the property that the Trustmaker decides to title in the name of the trust.
     
  • Beneficiary - The person or entity who is to receive the benefits of the property that is titled in the name of the trust.

Under this type of legal arrangement, the Trustmaker will transfer ownership of certain assets to the Trustee who will manage the assets for the benefit of the Beneficiary.

Living Trusts vs. Testamentary Trusts

When comparing living trusts with testamentary trusts, if the trust has been created to go into effect during the Trustmaker's lifetime, then it is referred to as an "inter vivos trust" or "living trust." On the other hand, if the trust has been created to go into effect only after the Trustmaker dies, then it is referred to as a "testamentary trust." Also, if a trust is created under the terms of a Last Will and Testament, then it is a "testamentary trust" for sure.

Revocable Trusts vs. Irrevocable Trusts

When comparing revocable and irrevocable trusts, if the trust is a revocable trust, then in most cases the Trustmaker, Trustee, and Beneficiary will be one in the same person. The two most common uses of a Revocable Living Trust are to plan for mental disability and to avoid probate of the assets that have been funded into the trust prior to the Trustmaker's death.

If the trust is an irrevocable trust, such as an Irrevocable Life Insurance Trust, then in most cases the Trustmaker cannot be the Trustee and Beneficiary, otherwise the purpose of the irrevocable trust will be defeated. The most common use of an irrevocable trust is to move assets out of the Trustmaker’s name and down to the next generation for their use and enjoyment, which in turn will reduce the value of the Trustmaker’s estate for estate tax purposes.

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