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  • Trust: Advantages and Disadvantages

    A “Trust” is an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner: “author of the Trust”: “Trustee”: “beneficiary”: “Trust property”: “beneficial interest”: “instrument of Trust.

    The person who reposes or declares the confidence is called the “author of the Trust”.

    The person who accepts the confidence is called the “Trustee”.

    The person for whose benefit the confidence is accepted is called the “beneficiary”.

    The subject-matter of the Trust is called “Trust-property” or “Trust-money”

    The “beneficial interest” or “interest” of the beneficiary is his right against the Trustee as owner of the Trust-property; and the instrument, if any, by which the Trust is declared is called the “instrument of Trust”.

    “Breach of Trust”: A breach of any duty imposed on a Trustee, as such, by any law for the time being in force, is called a “breach of Trust”.

    “Notice”: A person is said to have “notice” of a fact either when he actually knows that fact or when, but for willful abstention from inquiry or gross negligence, he would have known it, or when information of the fact is given to or obtained by his agent, under the circumstances mentioned in the Indian Contract Act, 1872 (9 of 1872), section 229.

    Advantages and Disadvantages of a Trust:

    Advantages of a Trust

    1. The biggest advantage of the Trust is that any property transferred to the Trust during your life time will pass directly to the beneficiaries of the Trust. The Trust property will not have to go through a Probate court. The advantages of avoiding Probate are that:
    • No Probate fees are due on property passing outside of Probate
    • The property will pass immediately to the beneficiaries.
    • The terms of the Trust remain private.
    (Keep in mind that property disposed of by a Will passes through Probate and is therefore subject to Probate fees and delays are normally associated with Probate. Furthermore, when a Will is probated, it becomes a public document that can be obtained and read by anyone.)

    2. A Trust is also a good way to make gifts to minor children or to provide for the care of elderly parents. It is also used by people getting on in years who are concerned with their own possible future incapacity.

    3. Saving on Taxes: The growth on assets, such as shares, transferred to a Trust is not subject to taxes, because the growth belongs to the Trust.

    Disadvantages of a Trust

    1. The need to draft a Trust document.

    2. The loss of legal control of assets. All assets are handed over to the Trust and are managed by the Trustees for the benefit of the beneficiaries. Author of the Trust can no longer own the assets, but he can exercise some control over them by being a Trustee.

    The three main uses of a Trust are:
    • To freeze the value of an estate which has a high asset value. In other words, if the author of  the Trust transfers an asset to a Trust, the asset’s value does not grow in his hands, which  would increase the amount of Trust that will have to be paid on his death.
    • To hold and protect assets for minors/incapacitated dependents.
    • To protect assets in the event of insolvency. Creditors cannot claim money held in a Trust.

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    Prem-Profile-PhotoAbout the Author

    I am Prem, the founder of TheFinanceConcept. I am an Investment Advisor and a part-time blogger. I hold PG degree in MBA (Finance) and pursuing CFA. Blogging has become my passion from April 2011. I enjoy writing articles on Securities Analysis and Financial Planning.
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