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What Is A Trust?

A trust is a type a specific legal entity which facilitates the transfer of assets, either cash or real property, to specific individuals or organizations. Trusts consists of the following parties which are the Trustor, Trustee, Trust Property, Trust Indenture and Beneficiaries. The purpose for establishing a trust is to make sure that at either the upon death or at a specific age or date assets are transferred to another legal entity either under terms or with no terms attached.

There actually a number of different types of trusts and different types of structures that can be applied for particular situations. Generally however the two broadest categories of trusts fall under revocable and irrevocable. As their names specify, a revocable trust is established in such a way that the Trustor has the ability to recall the property that was originally outlined as part of the trust. Often parents will put assets into revocable trust for children for various purposes.

Irrevocable trusts however once funded are legally binding and the Trustor no longer has the ability to recall property that has been transferred into the trust. This is an important consideration because once created, it is out of the Trustor's hands and cannot be altered. Once real property or assets have been transferred into a irrevocable trust a Federal tax identification number must be obtained to make it a separate entity from the Trustor's Social Security number.

After a decision has been made on whether a trust is revocable or irrevocable, then it is determined whether the trust is simple or complex. The characteristics which determine whether a trust is simple or complex is based on how the trust is administered and to whom are the beneficiaries. It is also important to remember that all simple and complex trusts are automatically classified as irrevocable. Trusts are also subject to the same tax scrutiny as any other asset or financial instrument.

Simple trust are designed in such a way that all funds flow directly into the trust and then once the trust terminates those funds are disbursed to specified beneficiaries. A complex trust on the other hand is classified as such because there are no limitations placed on the trustee and therefore they have complete power over how the trust is managed. Because of this level of freedom, complex trusts are highly scrutinized by the Federal government because individuals will try to use complex trusts for tax avoidance schemes.

Trusts can be highly complex and there can be significant tax and legal implications if a trust set up incorrectly or mismanaged. It is always best to seek professional advice from a licensed tax attorney or estate planning specialist to ensure proper trust creation. Whether an individual is trying to transfer assets to a charity after death or set up a trust for children once they become 21 years of age, there are numerous intricacies which must be followed to ensure successful implementation. Always consult a professional when dealing with trust related issues.