What is a Trust?

A trust is a legal instrument where property is transferred to another person. This individual, known as the trustee, manages the property in the trust. The property in the trust is called an asset, and it is held by the trustee for a third person, who is known as the beneficiary. This type of arrangement may be used in estate planning to protect assets being transferred to minor children, as a strategy to eliminate the need for probate or to save taxes.

Children are not considered able to manage their own financial affairs until they reach the age of majority. In some parts of the United States and in Canada, this is 18 years of age. In other areas of the US, a person is considered to be a child until he or she reaches the age of 21. In Australia, Ireland, New Zealand and the United Kingdom, a person is legally an adult when he or she turns 18.

A child who inherits property from a parent before he or she reaches the age of majority will need to have the assets held in trust until reaching the age of 18 or 21. The specific terms of the testamentary trust can form part of the parent's last will and testament. The money or property being held for the child can be used to pay for his or her education and living expenses until he or she is legally an adult.

Another type of legal instrument that is commonly used is a revocable living trust. Unlike the testamentary trust, this one takes effect during the grantor's lifetime and can be changed or revoked at any time on the written instructions of the grantor. Like a will, the revocable living trust contains instructions for distributing the grantor's assets on his or her death. This option may eliminate the need to have the estate probated once the grantor dies, but it does not reduce taxes payable on the assets held in the trust.

A person who wants to set up a trust as a way to reduce taxes on his or her assets can consider an irrevocable trust. With this option, the terms cannot be changed and the trust cannot be terminated, even if the grantor wishes to do so. The assets are no longer in the grantor's control, but he or she can receive an income from the trust that may be taxed at a lower rate than if ownership of the assets was held by the individual personally.