A trust is a legal creation set up to benefit someone or something. For example, some people set up trusts to benefit their children, their grandchildren, or even charities.
It is easiest to understand if you think about three separate people being involved.
One person, called the grantor, funds the trust somehow, by placing money or other assets into it. Any type of asset may be used, such as money, bank accounts, cars, and even real estate. The person creating the trust may also be referred to as a trustor or settlor.
The second person, who is known as the trustee, agrees to manage the assets.
The third person, who is known as the beneficiary, receives the benefits of the trust. For example, the benefits might include interest paid on money in the trust, a monthly allowance, or even a place to live.
The use of trusts as a planning tool can provide many benefits, including the following:
- Avoiding the formal probate process associated with transferring property using a will;
- Protecting assets from creditors;
- Caring for those who cannot care for themselves, such as minor children or those with special needs; and
- Reducing tax liability.
Although it may seem confusing, a trust can even be set up to benefit the person who puts the assets into the trust. In other words, while there are three roles to be played, each role does not have to be played by separate and distinct people. One person can serve in more than one of the roles.
For instance, a person may place assets into a trust, select someone else to manage those assets, and then receive the benefits himself. To take that example one step further, the person who is both the grantor and the beneficiary could even be the trustee if the circumstances suited such a scenario.
How a trust is drafted and who plays each of these three roles depends on the goals of the person setting it up.
In our next post, we will discuss the reasons to set up a trust.
Contact us today to schedule a Family Wealth Planning Session where we can explain trusts further and help identify the best strategies for you and your family.