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What is a Trust Agreement?
A trust agreement is a legal document that allows the trustor to transfer the ownership of assets to the trustee to be held for the trustor's beneficiaries. Trust agreements are created for many reasons:
- Allow your trustees to avoid probate
- Wealth management
- Tax advantages
- Keep the document in public record for when the trustor passes
A trust is a fiduciary relationship in which the trustor gives the trustee the right to hold title to assets or property for the benefit of a third party called the beneficiary. Trusts provide legal protection for the trustor’s assets or properties to ensure that they are distributed according to the trustor’s wishes.
Trusts also reduce paperwork and might avoid or reduce inheritance or estate tax issues. Trusts can also be a type of closed-end fund built as a public limited company in finance.
There are three main types of trusts:
- Living or testamentary : A living trust is a written document in which an individual's assets are provided as a trust for the individual's use and benefit during his lifetime. A testamentary trust defines how the assets will be used after the individual’s death.
- Revocable or irrevocable : A revocable trust can be changed or terminated by the trustor while the trustor is alive. An irrevocable trust cannot be changed or terminated once established. Living trusts can be revocable or irrevocable. However, testamentary trusts can only be irrevocable. Some might prefer an irrevocable trust because it is unalterable.
- Funded or unfunded : A funded trust has assets put in by the trustor while the trustor is alive. An unfunded trust, as the name suggests, has no funding. Unfunded trusts can be funded when the trustor dies or they can also be left unfunded.
Here is more on types of trusts .
Purpose of a Trust Agreement
Trust agreements are often used to determine how a person’s money should be managed and distributed while that person is alive or after their death. Trusts are used to protect assets from creditors and can dictate the terms of an inheritance for beneficiaries. Trusts can provide for a beneficiary who is underage or has a mental disability that may impair his ability to manage finances. However, trust agreements can require time and money to create and they cannot be easily revoked.
Trust agreements are generally used for the following purposes:
- Directing assets : For people with a high net worth or multiple assets, it might be really important that their assets and property end up in the right hands after their death. A trust legally solidifies ownership of their assets and properties or sets out ways in which they must be used upon the death of the owner or the trustor.
- Safekeeping of assets: For high net worth individuals, it can be important to keep their assets and properties safe. Trusts can provide a legal entity to hold on to a property, which doesn’t have to be a family member. This way trustor’s can direct their assets or their use even after their death.
- Managing wealth : Trusts and the rules set in a trust agreement can also help manage wealth for an individual or a family. Especially if the beneficiary or the dependent is underage or mentally impaired, a trust can help manage wealth without running into legal troubles.
- Privacy : Often living wills can be public, depending on the jurisdictions. Trusts provide a more private avenue to direct assets and properties.
- Estate Planning : Trusts can help in estate planning. Typically, assets of a deceased individual are passed on to their immediate family, However, trusts can control how much of an asset is passed on to which member.
- Tax Planning : Trusts can also help in avoiding taxes and probate. When assets in a trust benefit from a set to step basis they can have tax savings but if they are all given away altogether they can carry the original cost basis.
You can read more on tax benefits of trusts here .
Image via Pexels by Matthias Zomer
How To Write a Trust Agreement
There are a few components of a trust agreement you can follow while writing a trust agreement:
- Trustee and Trustor : Your trust agreement should define who the trustor or settlor or grantor is. Your trust agreement should also define the trustee or the trustee, or the person in charge of your trust.
- Objective : The trust agreement should outline the objective of the agreement. If your agreement is to pass on all your assets or properties, or if it is to be used in a specific way, it should be clearly outlined in your agreement.
- Kind of Trust : Since there are many types of trust, the trust agreement should define the kind of trust you will be establishing. Some common types of trusts are spendthrift trusts, charitable trusts, blind trust, special needs trusts, etc.
- Property : After you place your property in a trust it is known as the trust property.
- Beneficiary : Your trust should clearly define the beneficiary or beneficiaries–the person or people who will benefit from your trust.
- Rules : If there are any rules to be followed while establishing your trust, using your assets or directing the assets, it must be stated in the trust agreement. Rules should also state the jurisdiction that will be followed when interpreting the agreement.
- Signatures : Your trust agreement should be signed by you in presence of a public notary to avoid legal challenges later on.
You can seek legal services, consulting services or accounting services while creating your trust.
Who Owns Property in a Trust?
In a trust, the ownership of the property depends on the type of the trust agreement. Generally, the trustee is the legal owner of the property. The trustee is also known as the fiduciary and must follow fiduciary duties and obligation laid under the trust agreement. The trustee has the duty to manage the trust for the benefit of the beneficiaries as agreed upon in the trust agreement. In an irrevocable trust, the property is solely owned by the trust.
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