A Trust is a three party instrument whereby property is held by one person for the benefit of another. The holder of the property has a very strict obligation to manage the trust property in accord with high ethical standards, and in accord with all terms set forth by the person who established the trust. A trust can be created for any legal purpose. Examples of trust purposes include: taking care of minor children, providing for children’s educational expenses, supporting charities and minimizing taxes. The “Beneficiary” of a trust can be any person or organization, including the person who establishes the trust. The person funding the trust may be called: The Grantor, Trustor, Settlor, Donor or Creator. The person controlling the property is called the Trustee. The person who benefits from the trust is called the Beneficiary.
Wealth Management and Asset Protection
A trust helps with overall wealth management by protecting the settlor's assets after their death. A trust can be used to name minors as beneficiaries of the settlor's estate. A settlor can use it to ensure that the beneficiaries only receive assets after they reach a specified age. This reduces the chance of waste or misuse of assets.
Trusts have tax benefits. For example, if assets are placed into a trust, the beneficiaries are not required to pay taxes on the income generated and distributed from the trust twice. This is known as double taxation. However, if the trust earns more than $600 in income per year, the beneficiaries may be required to file a tax return for that year.
There are also capital gains tax benefits to placing assets into a trust. A person who sells an asset for profit may be required to pay a capital gains tax on the income generated from the sale. However, if legal ownership of an asset is transferred from one person to another through a trust, the capital gain received by the beneficiary is disregarded.