What is Trust Property?
Trust property refers to assets that have been placed into a fiduciary relationship between a trustor and trustee for a designated beneficiary. Trust property may include various assets, such as cash, securities, real estate, or life insurance policies. Trust property is also known as “trust assets” or “trust corpus.”
Key Takeaways
- Control and Benefit: Trust property refers to the assets placed into a trust, managed by the trustee on behalf of the beneficiaries designated by the trustor.
- Tax Implications: Some trusts have the potential to move tax liability from the trustor to the trust itself, under certain circumstances further safeguarding the trustor’s assets.
- Streamlined Estate Transfer: Through astute estate planning, trust property can pass directly to named beneficiaries upon the death of the trustor, bypassing the probate process.
Understanding Trust Property
Trust property is typically tied into an estate planning strategy. Estate planning is used to facilitate the seamless transfer of assets upon the trustor’s death while also aiming to minimize tax liabilities. Additionally, trusts can offer protection for assets in scenarios such as bankruptcies or lawsuits.
The trustee is responsible for managing the trust property according to the trustor’s directives, always considering the best interest for the beneficiaries. Trustees can be individuals or financial institutions, including banks. A trustor, often also known as a “settlor” or “grantor” can sometimes serve as a trustee, managing assets directly for the benefit of another individual, such as their son or daughter.
Trustees must adhere to specific rules and laws that govern the type of trust being executed. Once property is transferred into a trust, the trust becomes the rightful owner of those assets. For example, in an irrevocable trust, previous owners lose their control and claim over the assets within the trust.
Types of Trusts
Several different types of trusts can be established, generally categorized as revocable and irrevocable trusts.
Revocable Trust
A revocable trust allows the trustor to retain legal ownership and control over the trust assets. Consequently, the trustor is responsible for the associated income taxes. Additionally, estate taxes may apply if the value of the trust surpasses exemption thresholds at the trustor’s time of death.
Irrevocable Trust
In an irrevocable trust, the trustor cedes legal ownership of the trust assets to the trustee, thus these assets effectively exit the individual’s taxable estate, reducing potential liability. A trade-off for the trustor is the relinquishment of certain rights, such as the ability to amend trust beneficiaries once the trust is established, unlike a revocable trust.
Payable on Death (POD) Trust
A Payable on Death Trust becomes effective after the grantor’s death, accounting for the direct transfer of assets to a named beneficiary. Such trusts avoid the lengthy and costly probate process, ensuring efficient transfer of the property. Testamentary trusts fall under this category, where the assignment of assets occurs post-mortem and gets stated clearly in a will.
Living Trust
Living trusts allow for the transfer of assets during the trustor’s lifetime. A notable example is creating accounts in trust aimed at key financial objectives, such as saving for a child’s educational fund. These trusts are typically managed by a trustee and might restrict beneficiaries’ access to the funds until reaching a specified age or milestone, providing structured financial support, such as in a unified gift to minors act (UGMA) account.
Related Terms: revocable trust, irrevocable trust, beneficiary, trustee, estate planning, tax liability, probate.
