What Is A Trust? - Fidelity (2024)

FAQs

What Is A Trust? - Fidelity? ›

A trust is a fiduciary arrangement that allows a third party, or trustee, to hold assets on behalf of a beneficiary or beneficiaries. Trusts can be arranged in many ways and can specify exactly how and when the assets pass to the beneficiaries.

Trusts can be established to provide legal protection for the trustor's assets to ensure they are distributed according to their wishes. Additionally, trusts can save time, reduce paperwork, and sometimes reduce inheritance or estate taxes.

Your Assets Might Not Be Protected: Another crucial point to note is that not all trusts offer protection from creditors. For instance, in revocable trusts, the assets are not protected from creditors as the grantor retains control of the assets. Potential Tax Burdens: Finally, trusts can carry potential tax burdens.

Minimizing conflict, as trust instructions cannot be contested in court like wills can. Maintaining privacy by keeping your assets from becoming public record as part of the probate process. Protecting assets from creditors and lawsuits.

Trust funds serve several purposes, such as ensuring assets are protected, distributed properly, and transferred smoothly. Most trusts are living trusts — trusts that are created and enacted during the grantor's lifetime — that designate how assets should be managed and distributed when the grantor dies.

A living trust does not protect your assets from a lawsuit. Living trusts are revocable, meaning you remain in control of the assets and you are the legal owner until your death. Because you legally still own these assets, someone who wins a verdict against you can likely gain access to these assets.

The wealthy often use trusts to safeguard their money and minimize their tax burden. While trusts can be created by anyone, many people in the middle class are unaware of the advantages they offer. As a result, they miss out on financial benefits and asset protection.

A trust can be an extremely useful estate planning tool if you have a net worth of $100K or more, have substantial real estate assets, or are planning for end-of-life.

Once dominant in a market, critics alleged, the trusts could artificially inflate prices, bully rivals, and bribe politicians.

Why do trusts fail? ›

Trust is not funded. Once a trust is drafted and signed, until it is funded, it is not worth much more than the paper it is written on. All of the assets described in the trust should be moved into the trust in order for the trust to be funded.

There are many ways to set up a trust depending on what you want to achieve. You may see trust funds as a tool of the ultra-wealthy, but they can be useful to anyone who wants to protect their assets for the future needs of the people or causes that are important to them.

Irrevocable Trusts

Using an irrevocable trust allows you to minimize estate tax, protect assets from creditors and provide for family members who are under 18 years old, financially dependent, or who may have special needs.

A residence trust is another form of irrevocable trust because only irrevocable trusts can shield assets from estate taxes.

A Totten's Trust (also called a “poor man's trust”) is essentially the same thing as a Pay on Death (“POD”) bank account. (The name “Totten's Trust” is taken from a 1904 New York case involving a person with this name.)

In a trust, assets are held and managed by one person or people (the trustee) to benefit another person or people (the beneficiary). The person providing the assets is called the settlor.

The core idea of a trust is that there must be a separation of ownership or control of trust assets, from enjoyment of the trust benefits. This is where most trustees, who are also beneficiaries, fall foul of the law. Many people who act as trustees do not know what their obligations to the trust are.

Trust is the belief that another person will do what is expected. It brings with it a willingness for one party (the trustor) to become vulnerable to another party (the trustee), on the presumption that the trustee will act in ways that benefit the trustor.