What is a trust?
The first step in protecting your rights is to know what a trust is. There are a few additional definitions that go into understanding a trust, but put simply, a trust is a set of rules given by the settlor for the trustee to use when given a certain property or asset. It is like a legal way of turning you, the settlor, into the manager of your assets, but transferring the benefits, income, or use of the assets to the trustee or beneficiary.
Who is a settlor? Who is a trustee? Who is a beneficiary?
The settlor, sometimes referred to as the grantor or the trustor, is the person who makes the rules of the trust and supplies the assets. The trustee, who the settlor gives the title of the property or assets, handles it according to the rules of the trust. The settlor is the person allowing the beneficiary the benefits of their assets; the trustee the management over the assets. The trust is the list of guidelines on how the trustee is allowed to utilise the assets. The settlor may be a trustee and the beneficiary may be a trustee, which may or may not be deemed advisable depending on the terms of the trust.
How does this apply to you?
Now that some of the vocabulary has been established, it is important to know how this applies to your assets and legal rights. First, determine why you are setting up your trust. There are many reasons that trusts are established, but particularly they are established to protect the wishes of the settlor. This could be to ensure that assets are handled properly if death or tragedy occurs to the settlor. It could also be to make sure that assets that are spread over several geographies are handled to the specifications of the trust.
Commonly, trusts are formed to benefit children or grandchildren, but the settlor may not want to simply gift assets to their children, especially if they are not yet old enough to make serious financial decisions or investments. Trusts can also be formed with this same intention to help someone in the family who is not mentally capable of handling assets without the establishment of a trust.
How do you enforce your trust?
Whatever the reason for establishing your trust, it is important to know how to enforce the trust, especially if you cannot always be there to look over your assets. The type of trust that you set up will be the primary way to enforce your vision and rights to the assets that you have trusted.
Here are a few common types of trusts:
Interest in Possession Trust
This is sometimes called a life interest or a fixed interest trust and is used to protect the assets from being used up by one of the beneficiaries. For instance, if one spouse dies and leaves the trust to their widow/widower, it will allow the living spouse to use the assets as needed. However, this kind of trust will not allow the trustee to deplete the assets or redistribute the assets. This ensures that children will still receive their inheritance as set out by the settlor, while also allowing the widowed to utilise the assets in the meantime. This kind of trust can also protect children from a different marriage, so not just the children of the surviving stepparent receive the wealth.
Ultimately, this trust will give the settlor more specific control over how they want their assets managed and used.
A discretionary trust allows the beneficiaries of the trust more flexibility in how they will ultimately use the assets. The desire for flexibility could be for a number of reasons. Perhaps the settlor wants to allow for the beneficiaries to pass the assets gained from the trust to their own children, and the settlor may not be alive when said children will be born. As well, there may be a very dynamic shifting of needs within a family or group of beneficiaries, and the settlor wants to allow the flexibility of how the assets are distributed when the time comes.
Some people choose to form a charitable trust, making a charity the beneficiary of their assets. Such charities must be for some public good – helping the poor, educating those in need, or for some sort of religious organization. Maybe the settlor does not have a family that needs the assets, or the settlor wants to be remembered through their charitable trust, which can last for many lifetimes to come.
Why choose a trust instead of a will?
Many people choose to set up a trust instead of a will to safeguard their assets in the event of their death. Even though the initial setup fee for a trust is more expensive, there are other savings that make a trust worth while. One such is the avoidance of probate. Wills often take years to finalize and are subject to probate. Trusts on the other hand only take weeks to yield assets to the trustee and beneficiaries and avoid the lengthy court processing. As well, trusts, as opposed to wills, allow for more discretion and privacy since they do not need to be processed publicly in court.
What are the benefits of starting a trust?
As listed above, there are many reasons for forming a trust. Here is a checklist of some of the benefits:
- Protect assets by legally setting up guidelines for how your assets will be used in the event that you pass away or are unable to manage all of your assets.
- Avoid family conflicts by distributing assets as you want even in the event of children from multiple marriages, or grandchildren you will never meet.
- Avoid extra expenses and public exposure in probate court.
- Leave behind a legacy of charity to a cause that you care about.
This is just a small list of the things to consider when deciding on establishing a trust. Trusts are not only for the wealthy, but for anyone with a legacy, or family members who they want to protect in the future. If you have loved ones, a business, or are concerned for the future of your assets, a trust may be the way to protect yourself and your family.