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Types of Trusts and Benefits of Trusts

A trust is a fiduciary arrangement where a third party (trustee) holds the right to property or assets on behalf of a beneficiary. In layman's terms, a trust acts as a middleman who holds money or property so that it doesn't go directly into the control of the recipient.

While ‘trusts' are commonly associated with the rich and the ‘trust fund babies' to which they allocate their wealth. Trusts are quite versatile and can be used in various ways. A trust is a legal entity, holding rights as a person of its own, similar to how some corporations operate. Trusts involve a trustor (the person who wishes to put the assets into the trust), a trustee (the trust in which the assets are held), and a beneficiary (the person who wishes to access the funds within the trust).

The benefits of a trust are that the trustor will have full control over how, when, and to whom assets within the trust are distributed. Trusts can hold many different kinds of assets as well­­ (including, but not limited to, investment accounts, houses, and personal property). When these items are put into a trust, it may help to avoid inheritance tax liabilities which arise when put into a will. This is why one of the most common ways to pass on your house to your children before you die is by “gifting” the home within a trust. If you live for at least seven years after the gift was made, the child will not have to pay an inheritance tax on the property when you die.

If you are planning on using a trust for whatever reason, it is important to understand the different kinds of trusts. Trusts can be broken down into 4 categories:

  • A living trust (also referred to as an inter vivos trust) is a trust created while the trustor is still alive. This type of trust is commonly used for the efficient transfer of assets to beneficiaries without court proceedings after death. This saves time, court fees, and reduces estate taxes for the beneficiary.
  • A testamentary trust is set up after death, as according to your will. These terms can be changed up until your death, after which the terms are set in stone. The benefit of this trust is that it is simpler than a living trust.
  • A revocable trust is a subcategory of living trust, as it is created while the trustor is living. The terms of this trust can be altered by the trustor while they are still alive.
  • An irrevocable trust does not afford the luxury of flexibility to the trustor. Once the terms of the trust are created, the trust cannot be altered. The benefit of an irrevocable trust is that income from the assets does not get taxed to the beneficiary (nor the trustor's estate) when the trustor dies.

If you are interested in making use of any of these trusts, it is advisable to seek legal guidance from our office today as we strive to help guide you with your specific case. 

This is a California Business Law blog. It is not intended to be used as legal advice. For further information please contact the law offices of attorney Ramona Kennedy.

Ramona Kennedy (Attorney) received her Jurisprudence Doctorate and is a licensed attorney in California (USA).

You can contact attorney Ramona Kennedy Law Offices (Kennedy Law LC) for an initial consultation and case evaluation. The first consultation is free of charge. 

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