How Does a Trust Work?


Quick Answer

Trusts are a type of estate planning tool in which the grantor creates a fund by transferring assets and designates a trustee to manage the assets for a beneficiary. Trusts can be used by individuals with family that want to avoid a probate of their estate after their death.

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How Does a Trust Work?
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Full Answer

The grantor, or the person creating the trust, has the right to specify the terms of the trust, such as how the money or assets are invested. A living trust is created and put into effect while the grantor is still alive, but a testamentary trust is created to take effect after the grantor's death. If a trust has one individual acting as the grantor, trustee and beneficiary, then it is called a revocable trust and is used to plan for mental disability and other circumstances in which the grantor might not be able to make financial decisions on his or her own. An irrevocable trust is created for the benefit of the next generation so that the grantor's estate's value is reduced for tax purposes. A revocable living trust is the most popular type of trust.

The transfer of assets to the trust completes the process of creating the trust. At this time, the grantor decides how to divide the assets if there are multiple beneficiaries, and a trustee removal clause allows the beneficiary to select a new trustee if the current trustee is not managing the trust satisfactorily.

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