Browse Proptionary encyclopedia

Build your real estate vocabulary to be able to communicate and invest more effectively and professionally.

Trust

DEFINITION

There are several types of definitions for trusts in real estate. The definition of trust is a relationship that was established by a person, where two or more parties hold a person’s property with certain expectations on how to protect and use it for others benefit. Assets that are placed in a fiduciary relationship between two parties, which are known as the trustee and trustor, for a specific beneficiary is known as trust property.  Assets that can be considered trust property are: securities, cash, life insurance policies, real estate insurance policies. Trust properties are also called trust corpus, or trust assets.

EXPLANATION

The way a person can oversee how their property will be distributed either during their lifetime or after their passing is by using a trust. There are a large variety of trust types, and each has different purposes. A trust can be for the financial benefit of a surviving spouse or child, or even for a charitable reason. A trust that is created to avoid responsibilities of law or avoid creditors is declared as void by courts.  Laws involving trusts can be complicated, and there are a good number of them, but it can be broken down to determining if a trust was established, if the trust is legal if the trustee managed the property lawfully, and whether it is a private or public trust.

The creator of the trust is known as the settlor, the person that takes care of the asset in the trust for another’s benefit is known as a trustee,  and the person benefited by the trust is the beneficiary.  All terms of the trust, duties, powers, and rights, are all determined when the trust is created. The law of trusts is determined by court decisions as well as the state statutes. A trust’s validity is determined where the asset is located by the law of that state. Many factors are involved in this determination including the settlor’s intention, the settlor’s location, where the trustee lives, and other factors. Personal property can be orally held in a trust, but to be enforced it must be in writing.

A trust property often involves a strategy for estate planning and is used to help transfer the assets while reducing the liability for taxes. Some trusts are able to protect your assets even in events such as lawsuits or bankruptcy. The trust property is required to be managed in accordance with the wishes of the trustor and the best interests of the beneficiary by the listed trustee. The trustee does not have to be a person; it can also be a financial institution, like a bank.  The trustor, which is also known as a grantor or settlor, may also serve as trustee as they may be in charge of managing assets for a daughter, son, or another individual. No matter what role a trustee is given, the organization or individual listed must follow the laws and rules that specifically govern the manner in whatever trust type is formed.

Advantages Trusts Offer

Trust is complex, flexible, and often varies.  A trust has a good variety of advantages, but there are disadvantages for every type of trust, just as there are advantages to each. That is why it is so vital to discuss in detail with an attorney that works with estate-planning before you make any decisions. Now, let’s go over some of the plus sides of getting a trust. Some of the advantages to trust are:

▏            Lowering gift and estate taxes

▏            Condition the when and how that your assets will be distributed when you pass on.

▏            Allots your assets without delay, cost, or publicity of a probate court, which can cost between 5-7% of a person’s estate.

▏            Ensures protection from lawsuits and creditors for your assets.

▏            Allows you to dictate a successor trustee that can manage the trust if you cannot, and will manage the trust after you pass on.

Disadvantages to Trusts

As mentioned in the paragraph above, there are disadvantages to trusts just as there are advantages. One of the biggest disadvantages to trust is the cost. A basic plan for a trust starts at $1,600 but can go up to $3,000 and more based on the intricacy the trust entails. A basic trust plan includes trust set up, a health care proxy, a living will, and a will. There are additional fees needed to amend a revocable trust and in order to allow the trust after you pass on.

Another disadvantage to trusts is that you have to retitle any assets you want to be protected. If it is not titled after you pass on, the asset will be placed into probate, and it may not go to who you intended for it too, but instead to whom the probate court awards it to.

Trust Types

There are several various types of trusts that can be created by an individual. However, most trusts fall under one of two categories being either irrevocable trusts or revocable trusts. The difference between these two types of trusts is based on ownership. In an irrevocable trust, the ownership of the assets is passed to the person who is the trustee from the trustor. The assets then leave that person’s home, which lowers the taxable portion of the person’s estate. This type of trust also takes away a person’s right to mend the agreement for the trust, such as changing the beneficiary. A revocable trust has the asset owner keep control of and ownership of the assets in the trust. This leaves the owner responsible for taxes from generated income of those assets but allows the owner to change beneficiaries if they wish.

The types of trusts that fall under these two categories have varied and have their own purposes. One of these types of trusts is a POD trust, or payable on death trust. This type of trust is able to be created while the person is alive or after their passing on. This type of trust will move the assets to the beneficiary after the passing of the trustor. This type of trust and ones that are closely related to it are also known as testamentary trusts as the property is transferred after the passing of a trustor. This type of trust helps avoid the lengthy and costly probate process. This type of trust is also able to be listed in the will of the individual.

An asset that is listed in a living trust is able to be transferred at any point during the life of the trustor.  A good example of this is when a person opens banks accounts that are in trust for a child’s benefit or for expenses for college. The trustee will manage the assets carefully in this account, and the child will not have access to these funds or have the freedom to spend this income as they please. One such account type for this is a UGMA account or a unified gift to minors act account. What these types of account can also be set that they can access the money when they turn a specified age.

A revocable living trust is one that you would place most of your assets within. This would allow you to have a trust that is also known as a pour-over will, which covers anything that is outside of a trust if you were to pass on unexpectedly. This type of will or trust will direct assets that are not in the trust to be put in it so that your assets go to your chosen heirs.

A credit-shelter trust, which is also known as a family trust or bypass trust, is where a will is written up and a specified amount of the trust is left to the estate-tax exemption. This allows the rest of your estate to be given to your spouse with no tax attached. This can also be specified in how it will be used. This is a great way to increase the portion that your kids can inherit while protecting the assets from estate taxes. The best part about this is that when money is placed in this type of trust, it is free of estate tax forever, even if the amount increases. A dynasty trust, also known as a generation-skipping trust is one that allows for you to transfer tax-free money to at least two generations down, often for grandchildren. There is, however, a generation-skipping transfer tax that is separate from estate taxes that will have to be paid if the amount is more than the exemption amount.

A QPRT trust, or a qualified personal residence trust, is able to remove a residence’s value and give your home as a gift while you remain in control of the home for a time period set by you. You will need to outlive this trust, or the full market value of the property counts when a party passes. your home will be counted in your estate when you pass. A QTIP, or qualified terminable interest property trust is for families that have been through divorces, have stepchildren, and remarriages, and allows for you to direct assets to specific parties.

Directed trusts are a type of irrevocable trust that the trustee is divided into at least two separate parts. The first part is a trustee or investment advisor that is in charge of all decisions for investment, the second is the general trustee, who will hold all other powers.

Trust or a Will?

So how do you know whether you need a trust or a will for your personal situation? Well, here are the benefits of obtaining a trust versus getting just a will.  A trust can:

▏            Provide Minor Beneficiaries with Assets without Court Intervention.

▏            Minimize Estate Taxes.

▏            Keep Governmental Benefits Safe for a Disabled Person.

▏            Offer Creditor Protection for the Inheritance you leave behind.

▏            Help avoid the costly and frustrating probate.

A will cannot offer any of the above benefits, so let that help you make your decision if any of these options are important to you, a trust is a better option for your needs.

[quiz-new]