A trust is a relationship whereby property is held by one party for the benefit of another. A trust is created by a settlor, who transfers property to a trustee. The trustee holds that property for the trust’s beneficiaries. Trusts exist mainly in common law jurisdictions and similar systems existed since Roman times.
Traditionally used to preserve and protect assets while offering additional benefits as part of a well-crafted estate plan, a trust is a fiduciary arrangement that allows a third party, or trustee, to hold assets on behalf of a beneficiary or beneficiaries. Trusts come in many shapes and sizes and can be used in a variety of ways to minimize tax.
Estate and trust planning is, of course, a vital part of the work we at The Wooding Group perform for our clients. What follows is a brief summary of four important, though distinct and different, trusts that you should know about.
This is a trust arising upon the death of the testator (a person who has made a will) and incorporating such a trust in your will can provide significant asset protection and tax minimization for those who benefit from your estate.
Inter vivos Trust
This is a trust typically created while the donor is alive to hold property for the benefit of others – usually family members – for income splitting purposes. Two common uses of an inter vivos trust are to:
- Hold capital-growth investments for the benefit of children and grandchildren.
- Hold investments which earn interest, dividends and capital gains for the
benefit of children and grandchildren who are 18 or older.
Alter ego trust
This is a trust where the settlor (the person who creates the trust) is the sole person who has a right to all the income of the trust each year. Alter ego trusts are special in that it’s possible to transfer assets to the trust without triggering tax on accrued gains on the assets.
When the beneficiaries of a trust are all family members, the trust is referred to as a “family trust”. Not all trusts that are used in estate planning are family trusts. For example, a trust may be for philanthropic goals and have a charitable organization as the beneficiary.
As you can see from this very brief introduction to just four different types of trusts, estate and trust planning can be a subtle and complex process, with huge financial implications for legacy creation and intergenerational wealth transfer.
It is a subject requiring detailed discussion.
Please ask us how we can help you in your estate and trust planning.
The Wooding Group: 780 498-5047