What Is A Trust In Economic Terms?

So you want to know – what is a trust in economic terms? Perhaps, you plan to create a trust to manage your assets through trustees. Maybe, you wish to make an entity for poor and destitute. No matter the intention, getting familiar with the concept is a better bet to avoid problems later.

What is a trust?

It’s a fiduciary relationship wherein one party (called the trustor) provides another party (called the trustee) the right and power to hold title to assets or property for the benefits of a third party (called the beneficiary). Trusts are founded for a number of reasons. You can establish a trust to provide legal protection to your assets and ensure your property is distributed according to your wishes when you’re no more in this world. Creating trusts reduce paperwork, save time, and avoid or reduce taxes and inheritance in some cases. In the corporate and finance world, a trust could also be a kind of closed-end fund built like a public company.

Understanding trust

Trusts are founded by an individual along with his/her lawyer to decide how to transfer some parts or all of the assets to the trustee or trustees. The trustees are responsible to hold the assets for the beneficiaries. In some regions, it’s possible for an older beneficiary to become a trustee. For instance, in certain jurisdictions, the trustor could be a lifetime beneficiary as well as a trustee at the same time. A trust could be used to decide how an individual’s money need to be managed and distributed when the trustor is alive or after his death. Trusts also help to avoid probate and taxes. They can safeguard assets from creditors and dictate the terms of inheritance for the beneficiary. However, creating trusts involves time and money. Also, they can’t be revoked easily. You can also create a trust for a minor who’s immature to take financial decisions. Trusts are highly beneficial to folks with a mental disability who can’t manage their finances. Once such beneficiaries are deemed capable, they receive possession of the assets.

Types of trusts

There are various kinds of trusts. The list is virtually endless. However, each one comes in one or more of the following categories.

Living or testamentary

A living trust is a written document wherein a person allocates his assets in the trust for his use and benefits during his lifetime. When the person dies, his assets are transferred to his beneficiaries. The individual appoints a successor trustee who’s in charge of transferring all of the assets. A testamentary (will) trust outlines how an individual’s assets are designated after his death.

Revocable or irrevocable

A revocable trust could be terminated or changed by the trustor during his lifetime. On the other side, an irrevocable trust can’t be revoked or becomes irrevocable after the death of the trustor. Living trusts could be irrevocable or revocable. However, testamentary trusts could only be irrevocable. Irrevocable trusts are usually more desirable as they avoid or minimize taxes and ensure that the assets are dispersed as per the wish of the trustor.

Funded or unfunded

Funded trusts have assets put into them. Unfunded trusts only consist of the documents without funding. These trusts could become funded upon the death of the trustor or remain unfunded.

Bottom line

People create trusts for numerous reasons. They can be used for estate planning or tax planning. You can also use a trust to pass your assets to your legal heirs upon your death. Now that you know – what is a trust in economic terms and its purposes- it might be the right time to call your lawyer to discuss the best course of action.

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