A legal trust is a fiduciary relationship in which one party, known as a trustor or settlor, gives another party, known as a trustee, the right to hold title to property or assets for the benefit of a third party, the beneficiary.
Trusts are established to provide legal protection for the trustor’s assets, to make sure those assets are distributed according to the wishes of the trustor, and to save time, reduce paperwork, and, in some cases, avoid or reduce inheritance or estate taxes.
There are several types of trusts, each with different purposes and characteristics:
- Revocable Trust: Also known as a living trust, this can be altered or canceled during the lifetime of the trustor. The trustor also typically acts as the trustee, managing the assets in the trust.
- Irrevocable Trust: This cannot be altered or canceled without the permission of the beneficiary once it has been created. The assets in an irrevocable trust usually cannot be accessed by creditors and can be excluded from the trustor’s estate for tax purposes.
- Asset Protection Trust: This helps protect a person’s assets from claims of creditors.
- Charitable Trust: As the name suggests, this trust benefits a particular charity or the public rather than a private individual.
- Constructive Trust: This is an implied trust arranged by a court and determined from certain circumstances.
- Special Needs Trust: This is made for a person who receives government benefits so as not to disqualify the beneficiary from such government assistance.
- Spendthrift Trust: This is an irrevocable trust that limits the beneficiary’s access to trust principal, and the trust gives an independent trustee full authority to make decisions as to how the trust funds may be spent for the benefit of the beneficiary.
It’s important to consult with a legal or financial professional when considering the establishment of a trust, as the rules and regulations can vary by jurisdiction and personal circumstances.