Trusts today, that's the topic at hand. I'm really excited to talk about it. Maybe just give us a quick overview of the different types of trusts.
We see a lot of terminology, testamentary trusts, inter vivos trusts, and maybe along the way, you can go over some of the basic definitions. I think that most of us know what a beneficiary is, but maybe the terms of a settler and a trustee. Sure.
So absolutely. So trusts are kind of unique, right? A trust is not like a corporation.
So we think about professional corps and things like that for running a practice. But you know, a trust is actually not a legal entity. A trust is a relationship. It's a special type of relationship because what it does is it separates the legal ownership of property from the beneficial use and enjoyment of that property. So typically you'd have a settler who takes property, they would transfer that property, typically cash or investments into the trust.
for the benefit of somebody else, typically the beneficiaries, kids, grandkids, charity, you know, things like that. And then it's managed professionally by a trustee. Normally the settler is not the sole trustee because then there's tax issues, but maybe they're one of several trustees that would have a majority of voting control, ultimately make decisions about the trust assets. So the trustee legally owns the property inside the trust and manages it according to the trust deed, which is a legal document.
that governs the terms and conditions of the particular trust, and what happens to the income of the trust, what happens to the capital of the trust, on what conditions does it get distributed, and to whom does it get distributed. Now, in terms of categories of trust, there's really two types for tax. There's inter vivos, from the Latin, while you're alive, which is a trust that you set up while you're alive.
Then there's a testamentary trust, which comes into effect only when you die, and that's done with a lawyer, and those are paragraphs inside of a will. So testamentary trust versus individual trust. There used to be significant tax advantages of testamentary trust a decade ago. Those are all gone. So in most part, trusts are treated as a separate taxpayer.
In most cases, they pay tax on their income like everybody else. The difference being that trusts are taxed at the highest rate. So most people try to distribute all the income of the trust out in the year. The trust can claim a deduction for the amount that it pays out. And ultimately, trusts are a flow-through vehicle.
So I think in a nutshell, I would say, and even though there's all kinds of trusts from alter ego, trust for probate, we can talk about some of that later, trust for income splitting, trust for professional corps, there's all kinds of stuff. But at the end of the day, the easiest way to think about a trust is use a trust when you don't trust someone. I mean, that's really how I like to think about it. So you're setting up a trust.
Maybe it's for kids, maybe it's for dependents, maybe it's for someone with a disability. uh you want to have some control either during lifetime or after death so i'd say we use a trust when we don't trust someone for many many situations