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Trusts: What You Need to Know

 

You may be thinking of creating a trust to help manage your assets — or maybe you don't even know how a trust could help. Here is a basic overview of trusts:

  • A trust is created by you, the grantor. You write the rules governing how the trust will operate — what it will do and how and when to do it. Trusts are commonly created to provide support, education, asset protection, tax planning or charitable giving.
  • Trusts can be revocable — you'll be able to change the rules at any time. But trusts can also be irrevocable, meaning you cannot change the rules.
  • You appoint a trustee, who will have the job of managing the trust and its assets. You may appoint yourself as the trustee. Trustees follow the trust's rules. There are some trusts that allow the trustee to use discretion in some matters.
  • The trust receives gifts from a donor — and that can be you, too. You may permit your trust to receive gifts from others in addition to you or instead of you. Gifts can include cash, stocks, bonds, property or other types of financial assets.
  • Your trustee collects the gifts and invests the money according to the rules of the trust; for example, the recipient gets the money after college graduation. You may stipulate a yearly income from the trust.
  • The trust has three things — the principal, which is the money given; interest and dividends earned from the principal, also called income; and the profits, if any, from increases in the value of the principal, or capital gains.
  • The rules you've written for the trust will determine who gets the income, capital gains and the principal. That recipient is the beneficiary.
  • Trusts can have many beneficiaries — family members, friends, charities and even pets. Some beneficiaries are granted capital gains, while others get the principal. The trust states who gets what and when or under what conditions. The trustee makes sure the provisions in the trust are followed.
  • Different trusts do different things, so you may opt for more than one or even four or five. With living trusts, you place assets during your lifetime to be transferred to beneficiaries after your death. They are private and help you avoid probate. Testamentary trusts are contained in your will to provide for distribution after you pass; they can be used to provide for minor children.

In the absence of nationally uniform trust legislation, individual states have developed their own laws to govern establishing and maintaining trusts. The Uniform Probate Code sets forth provisions relating to wills and trusts and has been adopted by many states.

A common misconception about trusts is that they're very expensive to set up and advisable only for high-net-worth families. Although the wealthy have long used trusts, they actually can be both useful and economical for even modest-worth families. The only way to know how a trust can help with your family's estate plan is to speak with a professional.

 

 
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McCullough Rossi & Company, Ltd.
McCullough Rossi & Company, Ltd.
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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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