Reasons for creating trusts
Trusts are created for many reasons:
- To maintain control of assets in the event of incompetence (if you become unable to manage your assets due to a decline in health or mental fitness)
- To save on estate taxes
- To avoid probate
When significant amounts of assets are involved, trusts may also be established to maintain control over assets even after the original owner has died. For example, a trust may be set up with the sole purpose of paying college tuition for a grandchild. In this scenario, the money in the trust cannot be used for any purpose other than paying college tuition and cannot be used on behalf of anyone other than the grandchild.
The basic components of a trust
The are four main actors in a trust:
- Grantor: the person who creates the trust (also known as “donor,” “settlor,” or “trustor”)
- Trustee: the person, people, or entity (such as a bank) that agrees to hold the property or assets (the grantor may be the trustee)
- Principal: the property or assets themselves, including money, which is held in the trust and managed by the trustee
- Beneficiary: the person or people who ultimately receive the property or assets in the trust
Types of trusts
There are many different types of trusts, and depending on the type of assets you’re trying to protect or the your goals in setting up a trust, there may be some trusts that will better meet your needs than others.
The main categories of trusts are: