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Contrary to what many people think, trusts aren’t reserved exclusively for the wealthy. Everyone can benefit from a trust as they’re useful for many purposes, especially for asset protection.
A trust can be described as a legal entity that gives a person the opportunity to transfer the legal title of an asset to a person while giving another person the right to control the asset.
If you wish to learn more about this topic, like the requirements for creating a trust or who owns the property in a trust, then continue reading below to understand the basic ideas about the nature of a trust and its benefits.
The Purpose of Trusts
A trust can serve as one of the most powerful tools that you can include in your estate plan as it allows you to keep control of how your assets are managed following your death without forcing your family members to face the probate process.
Not only can you use trusts to avoid probate, but you can use them to reduce or eliminate federal estate taxes, and manage property for a beneficiary when direct ownership by the beneficiary is not wanted.
However, trusts are very helpful when people want to protect their assets if the creditors of the beneficiary are prevented from reaching the trust’s assets.
Different Trust Categories
Before continuing, it’s important to highlight the owner of the assets within a trust depends on the type of trust you create. Trusts are revocable or irrevocable and may take effect during your life or after your death.
Revocable trusts mean that they can be altered or revoked at any time, and this is why the IRS requires any trust assets to still be included in the taxable estate of the grantor.
This implies that the grantor should pay income taxes on revenue generated by the trust and even estate taxes on those assets remaining after their death.
On the other hand, irrevocable trusts are impossible to be altered once they are executed. The assets that are placed into an appropriately drafted irrevocable trust are permanently removed from a grantor’s estate and moved to the trust.
Income and capital gains taxes on assets in the trust are settled by the trust to the degree they’re not passed on to beneficiaries.
The assets in the trust may not be considered part of the estate upon a grantor’s death, which means they may not be subject to estate taxes. The majority of revocable trusts become irrevocable at the disability or the death of the grantor.
Top Benefits of a Trust
Even though trusts can be used for many purposes, they’re mostly used to control assets and provide security for the beneficiaries, provide for beneficiaries who are minors or need expert assistance managing money, reduce the effects of the estate or income taxes, provide expert management of estates, minimize probate costs, protect real estate holding or businesses, and maintain privacy.
Most people see trusts as a way to help them maintain control of assets while they’re alive, healthy, and medically competent, but also to maintain an indirect control of the disposition of assets if they’re medically incapable to do so or in the event of death.
Requirements for Establishing a Trust
To create a valid and legally enforceable trust, certain components are indispensable.
First of all, the grantor must be of sound mind and mentally fit to create the trust, and have full knowledge and understanding of the rights and obligations involved in a trust.
Furthermore, the trust must be created with a strong and valid purpose and the trustee must be capable of clearly identifying and ascertaining the beneficiaries of the trust.
In addition, the grantor must show that they had the intent to create the trust and transfer ownership of the assets within the trust to a trustee to hold and manage on behalf of beneficiaries.
Sometimes, proving certainty of intention does not necessitate a trust document but can be distinguished by words or the grantor’s conduct.
Last but not least, the grantor should define which assets are included in the trust and how much of the assets should be transferred, and to which beneficiaries.
This way the trustee can determine what they are responsible for holding on the beneficiaries’ behalf and how to distribute them following the death of the grantor.
Without these requirements being met, the trust is considered invalid and the assets continue to be the grantor’s property.
Trusts have become widely popular and used as many people are discovering their benefits and how they can help protect their assets. Hopefully, this post will give you a greater insight into how you can shield your assets privately and effectively.