What are Trusts?

Trusts are often associated with the rich, but a trust is an instrument often used in estate planning. So as long as an individual has some property, a trust may be formed as an arrangement for the disposition of property.

Basically, a trust is a system by which property may be settled in favor of another person under the management of a third party, referred to as a trustee. A trustee may be an individual or a bank, and serves as the fiduciary agent.

Trusts are entered into for a variety of reasons. It could be for the benefit of a minor, whose age precludes responsible management of the property, and usually ends when the beneficiary reaches the age of majority. A trust may also be used as part of a will, setting the terms of how assets will be distributed to beneficiaries. It could also be for tax purposes.

Another reason why trusts may be a good way to pass on property is the issue of probate. Under the traditional will and testamentary trusts, beneficiaries have to go through probate, which can be expensive as well as long-drawn out. One kind of trust that bypasses probate is the living trust, wherein the property owner (settlor) is still alive but created as a contingency against disability or incapacity. Married couples can also double their estate tax exemption if they include a formula clause. However, because such trusts repose a significant amount of control to the trustee, it is important that this person is someone who has a reputation for honesty.

In the US, the laws governing trusts depend on the applicable state, although 25 states have, as of July 2012, patterned their laws after the model Uniform Trust Code. It should also be noted that while state law prevails over the terms and conditions of trusts, federal law on tax issues also apply.  In general, trusts are taxed based on circumstances. An experienced attorney will know what type of trust will best suit the requirements of a client under the most favorable tax terms.