The Basics of a Trust

03
July

At first glance, the topic of trusts seems complicated due to the different types of trusts that are establishable. Most people conduct informal trusts on a daily basis. For instance, if the auto shop agrees to perform repairs on your vehicle and you decide to pay them when the repairs are completed. Many people mistakenly think that trusts are something that should be left to professionals in the legal and financial fields to discuss. It is recommended to seek the counsel of a professional before making a final decision, but it is wise for anyone that is thinking about starting a trust to have a basic understanding about what is involved.

Think of a trust as an arrangement. The arrangement consists of one person or group that agrees to hold the property of another person or group to benefit them. The terms of the trust are dependent upon the desires of the creator(s) of the trust.

Components and Categories of Trusts

Every trust has the same components. The creator of the trust is referred to as the “grantor.” The person or institution that retains the property on behalf of someone else is referred to as the “trustee.” The property or money held by the “trustee” is referred to as the “principal” or “corpus” of the trust. The person that has something to gain from the trust is referred to as the “beneficiary.”

As mentioned earlier, there are different types of trusts. All trusts fall into one of three categories: living trusts or testamentary trusts, revocable or irrevocable trusts, and trusts by purpose. They are grouped into these categories based upon relevance to each other. Remember there are many types of trusts, but they all fall into one of the three categories.

1. Living Trusts or Testamentary Trusts – Living trusts are trusts that are expected to become effective during the grantor’s lifetime. Testamentary trusts are trusts that can only be fulfilled when the grantor is dead; they are often referred to as a Last Will or Testament.

2. Revocable Trusts or Irrevocable Trusts – These types of trusts are based upon the plans of the grantor. Grantors can make changes to revocable trusts, but changes cannot be made to irrevocable trusts. Simply put, revocable trusts can be amended or revoked. Irrevocable trusts are final once they become effective. This is why grantors must consider their intentions carefully prior to establishing their trusts.

3. Trusts by Purpose – These types of trusts generally include the name of the purpose of the trust. For example, the Brown family establishes a trust to purchase their child’s house and car after college and names it “The Justin Brown Post-Graduate Trust Fund.” The name suggests that the purpose of the trust fund is for their son Justin Brown to use after he graduates college. These types of trusts are less common than the other two classifications because of their specific nature and because many different types of trusts can result based on the premise of purpose.

This post was written by

jason – who has written posts on Budget Clowns.
Father of three and married to a lovely women. Always looking for ways to save money, and invest it properly for my children's future.

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