Estate Planning – Understanding Different Types of Trust
In estate planning, knowing how to distribute your assets efficiently is as important as having a will written up. It might even be necessary so as to avoid a potential family dispute over the estate.
A trust is a fiduciary relationship in which one sets up to transfer assets to their inheritors. There are 3 main parties to the Trust, (1) the Trustor or the Settlor, who is the person owning the assets, (2) the Trustee, who is entrusted by the Settlor to hold and manage the assets and (3) the beneficiaries, who are the persons entitled to the benefits of the assets.
The two main types of trusts are Living Trust and Testamentary Trust.
- Living Trust, also a revocable trust, is set up during a person’s lifetime and it becomes effective immediately. The individual’s assets are provided as a trust for the individual’s own use and benefit during his lifetime. That individual retains the ownership and control of the properties in the trust and can change the terms of the trust or the trustees and beneficiaries anytime.
- Testamentary Trust is a trust that is created but will not be effective until one’s death. This is often created within a will and will be irrevocable since one would have given the control and ownership of their properties to their named trustees for the benefit of their beneficiaries after his death. With such trust, you would have given up the ownership of the properties, henceforth, all liabilities for the taxes that come with that too.
Therefore, a trust is usually set up to avoid hefty taxes on a person’s estate and any unnecessary delay for the transfer of the assets as a probate is not required. Or when the surviving children of the deceased are still minors under the age of 21, a trustee is required to control the assets until the children reach adulthood.
In today’s context, because of the high taxes that government impose on properties, an individual might use trust as a tool to own multiple properties (if they have many children too) to avoid these taxes. Because of the many benefits, the usage of trusts has become an integral part of estate and tax planning for both individuals and corporations.
However, a word of caution, remember that with such a trust, you are giving up the ownership of the properties, so you will not be able to claim that property back if you change your mind.
Still unsure if you should set up a trust? Consult legal advice here.