There are a variety of trusts, and each one has a different intent. In simple terms, a trust holds assets for a beneficiary, and it is a financial arrangement among the beneficiary, the trustor and the trustee.
The trustor is the party that creates the trust, while the trustee manages the trust’s assets for the benefit of the beneficiary. The trust contract outlines the instructions and rules regarding the assets in the trust. Of the available trusts, common ones are revocable, irrevocable, charitable and asset protection.
According to The Street, a common reason to set up a revocable trust is to transfer assets so they do not have to go through probate. The trustor can alter or terminate a revocable trust at any time, and the trustor often plays all three parts of the arrangement.
An irrevocable trust is popular because the assets in it usually avoid estate taxation. However, the assets transfer to the beneficiary, and a trustor cannot change or terminate any aspect of the trust.
According to FindLaw, a trustor often sets up a charitable trust to avoid paying gift or estate taxes. The beneficiary of this type of trust is a specific charity.
Asset protection trusts
An asset protection trust shields the trustor’s assets from future creditor claims. This type of trust may be irrevocable for a specified period of time, and then the trustor can regain control of the formerly protected assets.
Setting up a trust may be a smart estate planning tool, as it protects assets and can provide for a family’s future.