Answering to what is a financial trust, it can be defined as a fiduciary relationship that entitles one party as a trustor and the other party known as trustee pertains to the right to hold title to property or assets for the beneficiary party who then come to be entitled as the third party. The prime objective of trust establishment is to adhere to legal protection for the trustor's assets. It further ensures that those assets are well distributed in accordance with the wishes of the trustor.
The best part about maintaining trust is that it saves time and eases things with the reduction in the paperwork. Additionally, if we emphasize more on the benefits of trust then in some cases it has endeavored in avoiding or reducing inheritance or estate taxes. Speaking about trust in finance, it can be also a type of closed-end fund built as a public limited company.
Bifurcation of Trusts
There are variant types of trusts and each one of them comes with its distinctive categories listed below:
Living or Testamentary
Also known as an inter-vivos trust, a living trust is a written document in which an individual's assets are put forwarded as a trust for the individual's use and the benefit he or she incurs in their lifetime. At the time of the demise of this individual, the assets are duly transferred to his beneficiaries. Here, what is important to note is that the individual must have a successor trustee who shall bear the charges of transferring the assets.
On the other hand, a testamentary trust, which is also known as a will trust is a written documentation of the specifying assets of an individual that are designated to various individuals post the death of the concerned individual.
Revocable or Irrevocable
A revocable trust is a flexible trust option that can either be altered or dissolved altogether by the authorized trustor during his or her lifetime. Whereas differing from a revocable trust, an irrevocable trust can be defined in terms of a situation where a trustor cannot change the guidelines once it gets established or the one that has become irrevocable upon his or her death.
In consideration to living trusts, it can be either revocable or irrevocable. But in the case of testamentary trusts, it can only be irrevocable. Assessing between both of them, it goes without a saying that irrevocable trust is usually more preferable. The allowance of estate taxes to be minimized or avoided altogether is possible only for a fact that irrevocable trust is unalterable, and contains assets that have been permanently moved out of the trustor's possession.
Funded or Unfunded
A funded trust can be identified by the allocation of assets by a trustor who puts all that into during his lifetime. Differing to funded trusts, unfunded trust can be branded as a trust agreement that has no funding. They can transform into being funded trust once the trustor dies or leaves it as unfunded. The reason why unfunded trusts are not reliable is due to the perilous exposure of assets.
Thus, trusts are no complex vehicles to understand. An in-depth explanation is itself enough to break down the real essential elements of a trust.