Trusts — How do trusts, businesses, assets, and taxes all interact with each other?
If you check out Investopedia, they give this definition for a trust:
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. Trusts are established to provide legal protection for the trustor’s assets, to make sure those assets are distributed according to the wishes of the trustor, and to save time, reduce paperwork and, in some cases, avoid or reduce inheritance or estate taxes. In finance, a trust can also be a type of closed-end fund built as a public limited company.
For the longest time, I thought I understood what a trust is, based on this definition. It is after all a fairly straightforward and clear enough definition. But then I started wondering, how do you put it into practice? That is when I discovered there are different types of trusts. All of them have the same overall structure explained by Julia above. And yet they all have very different details that allow them to do very different things.
The very first trusts I learned about were the Revocable and Irrevocable Trusts. A revocable trust can be changed or terminated by the person that created the trust at any time. An irrevocable trust can’t be. As you can imagine an irrevocable trust provides more legal protections than a revocable trust can. For the…
