Investment trusts provide a way for a person or a company to set aside certain assets for a particular purpose. While attorneys can set-up an investment trust for a fee, in some instances a DIY approach will suffice. The legal aspects surrounding investment trusts may require a bit of research on the part of the person setting up the trust to ensure it’s done right.
A trust creates a separate entity as a legal owner of the assets contained inside the trust. Investment trusts may consist of property, cash or stock and bond shares. Once established, a trust is designed to distribute its assets to another person, group of people or organization according to a pre-determined schedule. When forming a DIY investment trust, required participants include a trustee, a grantor or donor and a beneficiary. The grantor/donor provides the assets that go inside the trust. The trustee takes on the role of managing the trust’s assets at the appointed time. The beneficiary is the person who receives distributions from the trust.
Investment trusts provide a legal method for reducing the amount of estate taxes owed at time of death. As a separate entity, a trust remains unaffected by the grantor’s tax status. In addition to tax shelter provisions, a grantor can set up an investment trust to serve one of several different purposes. Charitable trusts allow grantors to donate assets to a charity at time of death while still allowing the grantor to use or benefit from the assets while still alive. Bypass trusts enable married couples to provide a source of income for a spouse after one spouse die, which then passes to the children or other listed beneficiaries after the death of the second spouse. Spendthrift trusts are designed to provide a future source of income for a child or a dependent who is unable to make sound financial decisions on his own.
Creating a source of income for another person or organization is one of the main purposes for setting up a DIY investment trust. Trusts or trust funds come in two forms, known as testamentary and inter vivos. Testamentary trusts appear as part of a person’s will and only take effect after the grantor’s death. As part of a will, testamentary trusts go through the probate process, meaning court proceedings must first settle the estate before the trust takes effect. Inter vivos trusts take effect during the grantor’s lifetime and may assign the grantor as the designated trustee. With an inter vivos investment trust, the beneficiary doesn’t obtain ownership until after the death of the grantor, but can still receive income distributions from the trust during the grantor’s lifetime.
At the outset, someone looking to set up a DIY investment trust must determine whether the terms of the trust will be revocable or irrevocable. In the case of a revocable trust, grantors reserve the right to change the terms of the trust, while irrevocable trusts remain intact or unchanged. And while a revocable investment trust may allow for changes when unexpected events occur, grantors lose the tax shelter benefits provided through trust accounts. People with large estates may opt for irrevocable trusts as a way to avoid the probate process in addition to the tax protections. In order to maintain these benefits, the grantor of an irrevocable trust cannot assign herself as a trustee.
- MetLife: Establishing a Trust
- IRS. "Abusive Trust Tax Evasion Schemes - Questions and Answers: Basic Trust Law." Accessed June 26, 2020.
- Commonwealth Financial Network. "Estate Planning With Intentionally Defective Grantor Trusts." Accessed June 26, 2020.
- IRS. "188.8.131.52 (09-16-2013) Trusts - Intentionally Defective Grantor Trust (IDGT)." Accessed June 26, 2020.
Jacquelyn Jeanty has worked as a freelance writer since 2008. Her work appears at various websites. Her specialty areas include health, home and garden, Christianity and personal development. Jeanty holds a Bachelor of Arts in psychology from Purdue University.