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A trust is a legal arrangement under which an individual (grantor) who has money, property, or both deposits the money, titles, deeds, stocks etc with an institution (the trustee) or another individual. Trusts can be set up to last for a certain length of time or for a lifetime. The trustee manages the trust assets and may pay an income to one or more beneficiaries named in the trust agreement. When the trust time is ended or a certain event takes place (named in the trust) then the remainder of the assets is distributed to the beneficiaries. A typical trust might pay the grantor an income throughout his or her life and upon their death; the assets are divided among the children. A trust is a legal arrangement set up for various reasons. It may be for the protection of assets or the ability to reduce taxes on the estate. Some individuals may feel that a professional manager will help handle their assets grow in value. Others may fear incapacity at a later time in life There are many kinds of trusts. However, these instruments are generally reserved for estates with Significant assets. It is important to discuss trust arrangements with a professional adviser to understand the income and tax consequences of the various types of trusts and trust provisions. Generally speaking, income taxes are paid on the income that the trust earns. These may be paid by the trust or by the beneficiary receiving the income. A living trust is created by a contract and takes effect during the grantor's lifetime. If the trust can be changed or amended it is known as a revocable trust. An irrevocable trust does not allow for changes to be made in the lifetime of the trust. Trusts may be funded or unfounded. In an unfunded trust, the agreement is made and assets are added at a later time. For example, when the grantor dies and property and monies belong to him or her are deposited. Trusts are flexible enough so that they may either be used by the trustee for certain purposes or under no circumstances can anything but income be distributed. Wills are often used to direct the terms of a trust and it is important that these documents be in agreement or consistent.

Special Needs Trusts

Individuals with certain physical and mental disabilities are particularly vulnerable to conflict between disability benefits and income derived from other sources. It is possible to set up a trust for an adult disabled child that does not jeopardize these benefits. The "Special Needs Trust" (sometimes called a "Supplemental Needs Trust") provides money for rent, clothing, and extras, but that does not replace public benefits. It is important that an experienced trust lawyer is consulted to meet all the legal requirements. Individuals who are declared incapacitated to handle their own affairs, such as children, those with serious mental illness or dementias benefit from the trust arrangement. The trustee manages the trust and makes sure bills are paid, income is assured or in the case of children turns over management when they are old enough to manage their own affairs. A trust can help provide a smooth transition of the operation of a family's affairs when sudden incapcity occurs. Often this ease of administration is the primary benefit of having a properly funded trust.

This article was last updated on: 08/15/2011
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