You’ve likely heard the word “trust” before, at least in some legal sense. A trust is a tri-party fiduciary relationship. A grantor transfers legal title to an asset to a trustee. The trustee then holds the asset for the benefit of the beneficiary until the grantor allows the trustee to transfer title to the beneficiary. During the time in which the trustee holds the property, they must manage the property or asset for the benefit of either grantor or beneficiary (or both).
Trusts have existed since the year 400 B.C. From what archaeologists have been able to find, early records of Roman law contain examples of “testamentary trusts,” a term discussed later in this article. By the 1500s, British common law would adopt those examples and add “inter vivos trusts.”
Centuries later, we have a body of law that contains dozens of types of trusts, all with their own legal requirements. In this article, we’ll be talking about two specific characteristics of trusts: irrevocable and revocable.
Terms to Know
There are three terms to know, in addition to the definition of a trust that is discussed above. These terms are: (1) grantor, (2) trustee, and (3) beneficiary.
A grantor is also called a “creator,” “settlor,” or “donor.” This is the person or entity (such as a company, charity, museum, etc.) who is conveying the property in the first place. It is the person or entity that creates the trust.
A trustee is the person or entity designated in the trust to hold equitable and legal title to the property conveyed by the grantor in the trust.
A beneficiary is the person or entity that has the beneficial interest in the trust. This is the person for whom, at the end of the day, the trust was created.
In an irrevocable trust, the terms of the trust (conditions, specifications, etc.) cannot be modified, terminated, or amended unless the named beneficiary gives permission to make changes. The grantor has effectively transferred their ownership, which legally removes their right to make modifications or cancellations.
Types of Irrevocable Trusts
There are really two main types of trusts that can be irrevocable. These include testamentary and living trusts. A testamentary trust arises when the grantor dies. It is specified in the grantor’s will, so it must go through probate. A trustee is appointed to manage the testamentary trust, which contains assets of the deceased. This trust reduces estate taxes.
A living trust can be revocable or irrevocable. An irrevocable living trust is created during the grantor’s lifetime. A trustee is responsible for managing the grantor’s assets for the eventual beneficiary’s benefit.
Reasons for This Trust
Estate and tax purposes are the two main reasons that an irrevocable trust is set up. When this trust is made, the asset is removed from the grantor’s taxable estate. The grantor no longer owns it, so they do not have to pay taxes on it. The grantor is relieved of the tax burden, but they are also often relieved of any income the asset generates.
Who is this Trust For?
“Trust funds” have always been thought of as tools for the super-rich, but that isn’t the case. People who work in professions that might make them subject to lawsuits—lawyers, doctors, accountants, contractors, etc.—can use these trusts to shield their assets from lawsuits. A creditor can’t take what you don’t legally own. However, the loss of control and rigid terms are two disadvantages that often discourage people from forming them. These characteristics are not found in revocable trusts.
As you may have guessed from the name, a revocable trust can be changed or amended, and terms can be eliminated without the permission of the named beneficiary or beneficiaries. These changes can be made by the grantor during his or her lifetime. A revocable trust offers a degree of flexibility that an irrevocable trust does not. Grantors maintain control. They can even get rid of the trust during their lifetime, if they want.
Types of Revocable Trusts
A revocable living trust is the main type of trust to know when it comes to revocable trusts. This trust is created by the grantor during his or her lifetime, and it is during that period that he or she can make changes. There are dozens of other types of trusts that can be revocable as well, but the concept of a living trust is the main one to know.
Reasons for this Trust
A main reason people enter into a revocable trust is for privacy. A revocable living trust ensures that your estate, when you die, doesn’t enter probate court. Your estate’s possessions and assets are not dragged through the court system and publicized. A revocable living trust bypasses probate court
Additionally, revocable trusts adhere to a grantor’s wishes. They offer flexibility, and a grantor can change the terms of the trust if needed. They are not bound to their original decision-making.
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