Funds placed in a credit shelter trust are forever free of estate taxes – even if they grow. (Note that the step-up in basis applies to inherited assets in general, not just those that involve a trust.). Although there are many different types of trusts, each fits into one or more of the following categories: A living trust – also called an inter-vivos 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 trust or corporate trust is a large grouping of business interests with significant market power, which may be embodied as a corporation or as a group of corporations that cooperate with one another in various ways. A trust is a legal entity employed to hold property, so the assets are generally safer than they would be with a family member. (This type of trust is a constructive trust. An irrevocable trust is usually more desirable. All rights reserved. In finance, a trust can also be a type of closed-end fund built as a public limited company. The rules of a trust depend on the terms on which it was built. A testamentary trust, also called a will trust, specifies how the assets of an individual are designated after the individual's death. Omissions? Courts may also impose trusts on people who have not consciously created them in order to remedy a legal wrong (“constructive trusts”). Special Needs Trust: This trust is meant for a dependent who receives government benefits, such as Social Security disability benefits. An unfunded trust consists only of the trust agreement with no funding. In some areas, it is possible for older beneficiaries to become trustees. Each trust falls into six broad categories—living or testamentary, funded or unfunded, revocable or irrevocable. Articles from Britannica Encyclopedias for elementary and high school students. By signing up for this email, you are agreeing to news, offers, and information from Encyclopaedia Britannica. The offers that appear in this table are from partnerships from which Investopedia receives compensation. A simple example would be the situation in which one member of a family advances money to another and asks the second member to hold the money or to invest it for him. A trust is a fiduciary relationship in which one party, known as a trustor, gives another party, the trustee, the right to hold title to property or assets for the benefit of a third party, the beneficiary. Term trust Definition: An organizational structure that gives control over several business firms, usually in the same industry, to a single board of trustees with the purpose of monopolizing a market. For example, where one party obtains property from another by making fraudulent representations, the defrauding party is frequently required to hold the property in trust for the defrauded party. While a person may no longer borrow against the policy or change beneficiaries, proceeds can be used to pay estate costs after a person dies. The Standard Oil Trust, controlled by J. D. Rockefeller and dismantled through the Sherman … Finally, a person may create a trust to qualify for Medicaid and still preserve at least a portion of their wealth. This type of trust was outlawed by antitrust laws, especially the Sherman Act, passed in the late 1800s and early 1900s. A trust is one way to provide for a beneficiary who is underage or has a mental disability that may impair his ability to manage finances. They are a traditional means of providing financial security for families. trust - Student Encyclopedia (Ages 11 and up). This could be useful if the beneficiary needs to avoid conflicts of interest. Qualified Personal Residence Trust: This trust removes a person's home (or vacation home) from their estate. In some cases, the tax consequences provided by using trusts are lower compared to other alternatives. Testamentary trusts can only be irrevocable. The trustee may be a professional or may be a member of the family with experience in managing money, or a group of trustees may be chosen. Unfunded trusts can become funded upon the trustor’s death or remain unfunded. Blind Trust: This trust provides for the trustees to handle the assets of the trust without the knowledge of the beneficiaries. Image by Sabrina Jiang © Investopedia 2020, Qualified Terminable Interest Property Trust. Here's how the calculation works: Shares of stock that cost $5,000 when originally purchased, and that are worth $10,000 when the beneficiary of a trust inherits them, would have a basis of $10,000. Be on the lookout for your Britannica newsletter to get trusted stories delivered right to your inbox. A more complicated example of an implied trust would be the situation in which one party provides money to another for the purchase of property. Qualified Terminable Interest Property Trust: This trust allows a person to direct assets to specific beneficiaries – their survivors – at different times. The term trust is often used in a historical sense to refer to monopolies or near-monopolies in the United States A charitable remainder trust, funded during a person's lifetime, disperses income to the designated beneficiaries (like children or a spouse) for a specified period of time, and then donates the remaining assets to the charity. Consciously created trusts, usually called “express trusts,” are used in a wide variety of contexts, most notably in family settlements and in charitable gifts. As such, the usage of trusts has become a staple in tax planning for individuals and corporations. Setting a trust up properly typically requires expert advice from a trust attorney or a trust company, which sets up trust funds as part of a wide range of estate- and asset-management services.

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