The term “trust fund babies” is one term that many of us use, whether we know the meaning or not. So, what is a trust? what does it do for its owners? Who gets trust funds?
The manner with which wealth or the transfer of it has been discussed in the media or on programs or even Hollywood is deserving of a study. The likes of Rothschilds, the Kochs, the Rockefellers and the Getty’s have been known to have set up such for their children.
Sometimes, these were worth into the multi-millions and possibly billions and some most definitely got controversial, but the question that seems to have been unsolved is the one of if setting up trusts is the best way to preserve money.
This article discusses trust, examines it in detail, and tries to make sense of it, drawing notable examples in the real world of people who created and found themselves caught up in it. What do you think about trusts?
Anyhow you choose to look at it, trusts have been in use for a very long time, and will not be stopping anytime soon. So, while we explore the question of interest, we also take a look at some trusts that have made the rounds.
Many books, movies, and television series have been dedicated to asking the question, and for those that end up controversial such as that of John Paul Getty, they ask the question, what is in a trust?
This is because all those who seem to find themselves in and around it just seem to go crazy, but would anyone blame you if you went crazy over a fortune that can be considered substantial?
A television series by FX drama was centered around the kidnapping of the grandson of the oil magnate John Paul Getty. Given Getty’s position as the world’s richest man at the time, this proposition has unmistakable appeal.
Getty was worth $1.2 billion at the time, which translates to $9 billion today when adjusted for inflation. Getty had a lot of people to think about when it came to dividing his fortune.
See Also: How To Set Up A Trust in 2022: Facts and Secrets
What is a trust?
A trust is basically a legal structure that divides ownership of something into legal and equitable titles, with legal title kept by the trustee and equitable title granted to the beneficiary.
It is established when the grantors or settlors, the trustee, and the beneficiary sign a trust agreement document that explains the trust’s purpose and contents and names the trust grantors or settlors, the trustee, and the beneficiary.
Typically, the term “trust fund” is not used in the dispassionate legal sense that the term “trust” implies. It’s more of a pejorative term suggesting a concept that a person with a “trust fund” (which is technically impossible) has a disproportionately bigger general wealth and privilege that was bestowed upon them by someone else.
In the case of money, a grant is the transfer of funds into a trust, while distribution is the delivery of funds from the trust’s assets to the beneficiary by the trustee.
The trustee makes distributions in accordance with the conditions of the agreement. They are made with the trustee’s discretion in mind, and in a way that restricts the trustee’s ability to receive the item or asset put in trust for the beneficiary pursuant to the terms set forth in the agreement instrument by the settlor.
What is the use of a trust?
The usual purpose of a trust is to convey the trust res for the benefit of the beneficiary in accordance with the wishes and plan of the settlor or grantor, under the control of the trustee, with limited or non-existent dominion and control over the thing comprised in the trust res being granted to the beneficiary until and unless the trustee makes a distribution to the beneficiary.
The main advantages of estate planning are that it gives the settler greater control over the disposal of his or her assets than a will can, and it may also save money on taxes. The fundamental advantage, however, is that it avoids probate.
A trust can be regarded as illusory and hence a nullity if it is not constituted with legal sufficiency and accuracy, with the disposition of the trust res becoming the subject of judicial remedy.
See Also: Revocable Trust vs Irrevocable Trust: Difference | Best Option For Me
What is probate?
Probate is the procedure through which the probate court validates the decedent’s will, distributes property, and hears any objections to the will. Probate normally takes between one and two years.
Significant expenditures expended by attorneys and other specialists engaged to probate the estate, such as appraisers, may reduce the estate’s worth, leaving less for the beneficiaries.
Probate is required because titled property cannot be transferred without going to court to accomplish the transfer in the absence of trust. If the settlor were still alive, for example, he might readily transfer property to someone else by signing a few paperwork.
When the settlor dies, he is unable to provide consent for the transfer of his property, necessitating a court appearance.
By assuming legal title to the property, a trust avoids this dilemma, and because the trustee has legal title to the property and the trust outlives the settlor, the trustee can transfer property without going to court.
What are the components of a trust?
Settlor, trustee, beneficiaries, and property are the four components of trust. The trust is established by the settlor (also known as the grantor or trustor). The trust is managed by the trustee, and the beneficiaries benefit from it.
Unless it is for charitable purposes, the beneficiaries must be identified since only they have the standing to enforce the trust’s provisions or the trustee’s fiduciary responsibility.
The settlor and trustee are frequently the same people, and the beneficiary is occasionally the same person! The settlor, however, cannot be the sole beneficiary; otherwise, the trust would be useless.
The legal and equitable title to the property is said to merge in such a circumstance, and there is no bifurcation of the property interest, and thus no distinction between the settlor’s property and the trust’s property.
Beneficiaries are required since it is they enforce the terms and for whom the trustee manages the property. As a result, pets are not eligible for benefits. They may benefit from an honorary trust, but they are not legal beneficiaries because they are unable to enforce its rules.
The trust primary is the property held by the trust (aka trust corpus, trust res). The trust can only exist if it has assets because, without assets, it has no function.
Beneficiaries may receive only the trust’s income or a portion of the trust’s principal. The trust, on the other hand, ends when all of the property has been transferred to the beneficiaries.
Types of trusts
Because it is handled by the trustee for the benefit of the stakeholders, trusts are an excellent tool for holding and managing property when there are numerous owners or beneficiaries.
General trusts are divided into two categories: simple and complex. There may be no charitable contributions or corpus distributions in simple trust, and all trust accounting revenue must be distributed annually. Simply said, a complex trust is one that is not a basic trust.
Businesses formed business trusts in the past because they were less regulated than corporations. The trust was a successful technique of managing varied enterprises and generating monopolies so that higher prices could be charged in the late 1800s and early 1900s, which is why antitrust laws were developed to prevent or break up such monopolies.
There are also two types of trusts that exist: revocable and irrevocable. The settlor can withdraw a revocable trust, while an irreversible trust cannot be revoked.
Irrevocable trusts are formed and operated in accordance with the trust agreement used to create the trust, which may or may not be the grantor. Irrevocable trust trustees must file Form 1041, U.S. Income Tax Return for Estates and Trusts, every year as independent taxable entities.
Irrevocable trusts are frequently used to extend dead hand control over the trust property, shield assets from beneficiaries’ creditors, and avoid unnecessary transfer taxes.
See Also: What Is Trust Investing? Overview, And How It Works
Can trusts be taxed?
There are unique tax requirements for trusts, but they must follow the laws of the state in which they are formed because the federal government will only recognize trusts that are lawful under state law.
A revocable trust’s revenue is included in the grantor’s income tax, thus there is no need to file a separate tax return for the trust. If a trust’s income exceeds $600 when it becomes irrevocable, it must submit Form 1041, United States Income Tax for Estates and Trusts.
Individuals are taxed at a greater rate than trusts. Although the marginal tax bands are nearly identical, they start at substantially lower income levels. For example, when undistributed trust income hits $12,750 in 2019, the maximum tax bracket of 37 percent kicks in.
Similarly, investment income is subject to a 20% capital gains tax and a 3.8 percent Medicare surcharge, which explains why the majority of trust income is delivered to beneficiaries on an annual basis.
If the trust has income left over at the conclusion of the tax year, it must pay taxes on it at its own rates. If the income is transferred to the beneficiaries before the end of the tax year, the income is taxed at the rate applicable to the beneficiaries.
Do I need money to set up a trust?
To start a trust, you don’t need any money, per se. These things are not that straightforward, and nor are they complicated either.
Trust necessitates a number of factors. One of the items is “property,” which does not always imply cash or money. It might be a mansion, a collection of art, or even your company’s trademarks. (One thing is sure and that is that it requires a trustee and at least one beneficiary.)
A trust can be thought of as a distinct agreement that holds assets for the benefit of others.
It’s preferable to have an attorney draft one up for you, but if you’re familiar with the legal and tax regulations, you can do it yourself. It’s similar in nature to form a limited liability company (LLC) or any other type of business.
See Also: How To Set Up A Trust in 2022: Facts and Secrets
What is a trust fund baby?
Someone who receives a fund is a trust fund baby. It’s frequently used in a negative manner to indicate that the person of interest has probably never had to worry about money in their lives. This is because they have enough money from their trust to live a very comfortable, if not luxurious, lifestyle.
What many people usually do not seem to understand is that most of the people who are beneficiaries of these things are not always raised up in wealthy households.
It’s fairly normal for one family member, let’s call him the rich uncle, to amass vast sums of money and establish these setups for their nieces and nephews. It’s possible that the nieces and nephews will be raised by middle-class or even destitute parents.
When a wealthy parent disapproves of their child’s marital partner, career, politics, or other factors, trust funds are commonly established for the children solely. It’s also done when there’s a chance the parent may be sued or won’t be able to handle their finances properly.
What is an antitrust law?
Governments enact antitrust laws to protect consumers from aggressive business activities and guarantee fair competition.
Market allocation, bid-rigging, price-fixing, and monopolies are all examples of illegal commercial practices that are subject to antitrust legislation.
The Sherman Antitrust Act of 1890, the Federal Trade Commission Act, and the Clayton Antitrust Act are the three main pieces of antitrust legislation in the United States.
See Also: 10 Best Paying Jobs in Real Estate Investment Trusts (REITS)
The beautiful thing about asking the whole topic in view is that reading or meeting someone who has one reveals to you a level of depth and some level of understanding as to how they operate.
While trying to secure a legacy, people have known this to be a way that works and they have explored it to the best of their ability. It is not too far-fetched if everyone understood how it works.
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