Setting up a trust is a favorite strategy of estate planners as it creates a way to avoid probate when assets are transferred after the death of the individual who set up the trust. A trust is a type of legal entity that is separate from your own personal estate. This legal entity has certain rights and advantages for those engaging in estate planning.
What is a Trust?
A trust is a type of legal entity that is set up to hold property or assets for the benefit of an individual. The person who sets up the trust, or the grantor, puts the assets in the possession of another individual, known as the trustee. The trustee then watches over the assets in the trust and eventually may transfer them to a beneficiary. A trust is set up by creating a legal document and transferring ownership of property over into it.
A trust is a legal entity that can hold property. The trust can hold many types of property such as real estate, stocks, bonds, cars, cash and other personal assets. When you set up the trust, you must transfer the ownership of the items over to it. For example, you set up a new bank account with the name of the trust instead of your own name. You transfer the deed to your real estate over to the trust.
Being a legal entity, a trust must also file a tax return. If you are the owner of a trust, you will file Form 1041 for the trust every year at tax time. On the tax return, you will include any information about income that the trust generated over the course of the year. For instance, if the trust holds bonds and received interest payments over the course of the year, you must report this income to the IRS and pay taxes on it.
Even though a trust is a legal entity, if it is a revocable trust, the assets are still considered part of your estate. When you die, the assets in the trust will be added to the other assets in your estate to come up with the total estate value. If you want to remove assets from your estate, you must set up an irrevocable trust. When you set up an irrevocable trust, the terms of the trust generally cannot be changed and you might not be able to use the assets anymore.
- Oregon State Bar: What Is a Trust?
- Turbo Tax: Buyer's Guide -- If You Need to File ...; November 2010
- Free Advice: Setting Up a Legal Trust
- The 'Lectric Law Library: What is a Trust?
- Internal Revenue Service. "Instructions for Form 5227: Split-Interest Trust Information Return," Pages 1-2. Accessed July 24, 2020.
Luke Arthur has been writing professionally since 2004 on a number of different subjects. In addition to writing informative articles, he published a book, "Modern Day Parables," in 2008. Arthur holds a Bachelor of Science in business from Missouri State University.