A trust is a legally binding arrangement in which certain assets are transferred by one party (the Settlor) to another (the Trustee). The Trustee holds legal title to the assets. Assets held in trust are to be used for a specific purpose (such as charity) or for the benefit of persons named as the beneficiaries (which may or may not include the Settlor). Transferring assets to a trust have several benefits.
First, a trust is used for succession planning. When the owner of the assets passes away, the assets are distributed according to the terms of a trust, rather than the terms of a will. Because the Settlor no longer has legal title to the assets, this avoids the need for probate and the public record of assets created by the probate process; a trust is a way to keep such details confidential. Because assets held in trust are not included in the grantor’s estate, this method can also lead to reduced estate taxes.
Some people choose to place their assets in a trust to avoid diluting ownership through passing the asset down through several generations. For example, a family business held in a trust can benefit family members while ownership of the assets remains with the Trustee rather than partial ownership split among multiple family members in several generations.
Many people transfer their assets to a trust as a way to ensure that they and their assets are protected in the event of old age, mental, or physical disabilities. If you are concerned about this possibility, you may want to place your assets in a trust, with yourself named as a beneficiary and a person you trust named as Trustee. If you become incapacitated, the trustee who you have named can manage and distribute your assets, including to pay for your continuing care.
A trust can also be set up to provide for minors and young adult children who are not yet able to manage the assets themselves. The trustee manages the trust until the named beneficiary is mature enough to handle it on their own (typically when the beneficiary reaches the age of 18, although the trust can be set up so that the assets are transferred to the beneficiary at some other point in time).
While the reasons above are some of the most common reasons for setting up a trust, there are others. If you are considering transferring your assets to a trust, speak with a lawyer to determine whether a trust may be appropriate for your needs.