What is a Personal Trust?

N. Madison

A personal trust is a financial arrangement that is used to give another party the control of assets that are intended to benefit a person or group of people. When a person creates a personal trust, he places assets into the trust and designates a trustee to control and manage those assets. The trust is considered a legal entity that is separate from the person who created it, called the grantor, and the person who stands to benefit from its assets, called the beneficiary. Like some other types of entities, a trust can buy and sell property in addition to simply holding and managing it.

Man climbing a rope
Man climbing a rope

There are many reasons a person may establish a personal trust. It can be done to provide income for a beneficiary or group of beneficiaries or to meet the educational expenses a beneficiary may have. Sometimes these trusts are created to provide money for the medical needs of the beneficiaries. A person may even set up a personal trust to leave his assets to a loved one yet include a clause that keeps the beneficiary from using the assets in an irresponsible manner.

One type of personal trust is called a revocable trust. When a person creates this type of trust, he retains the right to change his trust at any time and as he sees fit. In some cases, an individual who decides to create a personal trust may opt to create an irrevocable trust instead. Once this trust is created, it cannot be changed, even if the grantor changes his mind for any reason. With this type of trust, the trustee is usually given discretion in deciding when and how to give funds or distribute assets to the trust's beneficiaries.

An individual who wants to create a personal trust may also decide between creating a testamentary trust or a living trust. The difference between these two is when the trust will take effect. A testamentary trust takes effect when the grantor dies while a living trust starts during the grantor's lifetime. Testamentary trusts are established in a will while living trusts are not.

In some cases, a living trust may continue after a grantor dies. In such a case, the trust may automatically become an irrevocable trust. This is not always the case, however. In some cases, the assets in the trust may be distributed to the beneficiaries after the grantor's death.

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