There are a plethora of reasons why trusts are formed, the question is why are there different trusts and what is their purpose?
Before we get into the reasons and taxation concerns, let’s define all of the moving parts of a trust. A trust is a legal document, containing a Grantor (sometimes referred to as Trustmaker), this is the person making the trust. Then you have a Trustee, the person or entity that controls the assets in the trust.
Then you have the beneficiaries, the person(s) that will receive the assets of the trust under the conditions laid out in the trust. An important concept to understand is that there are Revocable Trusts, meaning the trust document can be changed and Irrevocable Trusts, which cannot be changed.
For tax purposes, a Revocable Trust is a Grantor Trust, which means the Grantor pays any income tax that is due on the money that is earned in the trust. Revocable Trusts are usually formed to avoid probate, a process that varies between the states.
Generally, a person can die intestate, meaning they had no estate plan. The person’s estate will go through probate and the assets will be disbursed according to the laws of the state.