A trust, in the context of law and finance, is a fiduciary relationship where one party, known as the trustor, gives another, the trustee, the right to hold title to property or assets for the benefit of a third party, the beneficiary. However, the two primary ways to create a trust are through a declaration of trust and a trust under agreement. Each of these methods has its unique characteristics and implications.
Understanding the distinction between these two types of trusts is crucial for individuals planning their estates, business owners creating business succession plans, and for those dealing with property and assets management. This article delves into the intricacies of declaration of trust versus trust under agreement, offering clarity for decision-making and planning.
Declaration of Trust
A declaration of trust, also known as a formal or inter vivos trust, is created when the trustor, typically the settlor, declares their intention to create a trust. This is usually done during the trustor's lifetime, although it can also be established via a will. The declaration outlines the terms of the trust, including the trustee's duties and the beneficiary's rights.
Declaration of trusts is typically used in context of estate planning for wealth distribution among beneficiaries. They can be revocable, meaning the trustor can modify or dissolve the trust, or irrevocable, which becomes permanent once created.
Revocable Trust
A revocable trust allows the trustor to maintain control over the assets. They can alter the terms, appoint new trustees, or even dissolve the trust at any time. This flexibility makes revocable trusts a popular choice for estate planning, as they can help avoid probate and provide taxation benefits.
However, the assets remain under the trustor's control, meaning they're subject to their creditors' claims. Moreover, the IRS considers these assets as part of the trustor's taxable estate.
Irrevocable Trust
An irrevocable trust, once created, cannot be altered or rescinded by the trustor without the beneficiary's consent. Assets transferred to an irrevocable trust are no longer considered the trustor's property, making them less vulnerable to creditors' claims. This type of trust is an effective tool for tax planning and protecting assets from estate taxes.
However, once created, the trustor loses control over the assets. This could be a disadvantage if the assets decrease significantly in value after creation or if the trustor outlives the trust's term.
Trust Under Agreement
Different from a declaration of trust, a trust under agreement, or a testamentary trust, is created when a trustor creates a legal agreement with another party, often a trust company. This agreement outlines the terms of the trust, including the rights and duties of the trustee and the beneficiary's benefits.
Testamentary trusts are often used in conjunction with wills, allowing for a continuous management of assets after the original owner's death. They're also commonly used for minors and beneficiaries who may not be capable of managing assets themselves.
Living Trust
A living trust, a type of trust under agreement, is established during the trustor's lifetime and is thus revocable. The trustor can modify or terminate the trust at any time. However, on the trustor's death, the trust automatically becomes irrevocable, ensuring continuous management of assets according to the trustor's wishes.
Living trusts are often used in estate planning to avoid probate, keep assets private, and maintain financial independence if the trustor becomes incapacitated. But like revocable trusts, assets remain part of the trustor's taxable estate.
Testamentary Trust
Included in the trustor's will, a testamentary trust takes effect after the trustor's death. Once created, it's irrevocable. Testamentary trusts are typically used to provide for minors or dependents, maintain continuity of a family business, or protect assets from creditors.
The beneficiaries have less control over the assets, but the assets are typically protected from creditors and are not included in the trustor's taxable estate.
Understanding the nuances of a declaration of trust versus trust under agreement is vital for creating a robust estate plan or managing assets effectively. You might consider consulting with a legal or financial professional for advice tailored to your specific circumstances. The right trust can provide peace of mind, protect your assets, and ensure your wishes are carried out according to your intent.