In my last post I gave my top 3 reasons you might want to establish a trust. In this one I’m going to explain to you how a trust works. People often create trusts to help manage their assets. There are many different types of trusts. I will go into detail on the types in a future post.
The person who creates a trust is called a grantor (may also be called settlor or trustor). The grantor writes the rules governing how the trust will operate and what assets will be placed in the trust. If the grantor creates a revocable trust the rules can be changed at any time. If the trust is irrevocable the rules cannot be changed.
When creating the trust the grantor will appoint a trustee. The trustee’s job is to manage the trust and its assets. The trustee must follow the rules set up by the trust, though some trusts do allow the trustee discretion in making decisions. The grantor will often appoint himself as trustee. If you do this you will also need to name a successor trustee for when you die or in case you become incapacitated.
After the trust is created it receives a gift from the donor. This is usually the grantor although the trust can be set up to receive gifts from others. The trustee will collect the gifts and make investments according to the rules of the trust. The trust will end up with three things: 1) the principal, which is the gifts and money placed in the trust, 2) income, which is the money earned by the principal from interest and dividends, and 3) profits from increases in value of the principal, called capital gain. The rules of the trust will determine how these are distributed.
The people who receive these benefits are called beneficiaries. These are the people for whom the trust was created. Beneficiaries can be anyone the grantor chooses – family, friends, businesses, charities, etc. The trust itself should lay out how and when the trustee should distribute the trust assets to the beneficiaries.
This is just a basic overview of how a trust works. If you would like more information or would like to create a trust please contact Sharkey Law today .