What is a Voluntary Trust?
A voluntary trust is a fiduciary relationship between a trustor and beneficiary used for estate planning over an individual’s lifetime. A voluntary trust is also known as a living trust, and its lifetime is set at the time of creation to meet both parties’ needs as they see fit.
The trustor holds the legal title over the “gift” that will be transferred to the beneficiary. However, the beneficiary owns the title, possession, and power to carry out the trust’s actions. The trust can facilitate the transfer of assets to the beneficiary during or after their lifetime.
The opposite of a voluntary trust is an involuntary trust. In an involuntary trust, the court exercises control over the trust – regardless of either party’s intent – to amend and benefit a party that was deprived of their rights.
- A voluntary trust upholds the fiduciary relationship between a trustor and a beneficiary.
- It is an estate planning system that facilitates the distribution of assets as “gifts,” meaning the beneficiary is not entitled to provide anything in return, contrary to trusts of value.
- A voluntary trust is made up of the trustor, trustee, and beneficiary.
When is a Voluntary Trust Used?
A voluntary trust is used in estate planning, which entails the management or distribution of a person’s (trustor’s) net worth at any point in their life – alive or dead. Common attributes of an estate include an individual’s legal rights, interest, property entitlement, and all other assets minus the liabilities at that specific time.
In relation to common assets such as a house or car, the person controlling the asset is referred to as the trustee, while the person receiving that asset in the future is known as the beneficiary. In most situations, a trust is initiated to provide legal protection over the trustor’s net worth and to oversee the best wishes of that person. Ultimately, the process saves time, costs (through taxes), and paperwork hassle.
In a voluntary trust, the beneficiary receives the assets as a gift, of which they are not required to provide anything in return. Conversely, a trust of value could be chosen, which provides benefits to purchasers or mortgagees.
In some cases, voluntary trust can reference interpersonal trust between two or more individuals that outline each other’s obligations. This is not a formal contract, rather a man/woman’s word from one person to another. From the legal perspective, voluntary trusts have a formal agreement that grants the power to oversee and sometimes manage an individual’s assets.
An involuntary trust is created by a court to uphold the benefits of a party who was unjustifiably deprived of their rights. In some cases, the people seeking to put an involuntary trust in place are victims of fraud, legal error, or the trustor’s improper influence or judgment.
Involuntary trusts are also referred to as constructive trust. The person wrongfully obtaining or possessing legal property that should not be in their custody – sometimes due to a break of fiduciary duty – will be brought to court and reversed. The most frequent breach is within fiduciary duty, such as when an agent wrongfully obtains assets owned by a principle.
How to Set Up a Trust Fund
In order to establish a trust fund, there must be a grantor/trustor (sets up the fund and puts their assets into it), a beneficiary (person to receive the assets from the fund in the future), and a trustee (charged with the management and eventual distribution of the fund).
Some trust funds are more appropriate for specific individuals over others. The first step is finding which fund best suits you based on a multitude of personal factors. From there, the trustor can choose to fulfill the trust on their own or choose a professional estate or trust attorney to help bring it to fruition.
As trusts can be very complicated, most people choose the latter option. After deciding on the details, the trust advisor will formulate the legal trust documents. At this time, the trustor must fund the trust and register it with the Internal Revenue Service (IRS) or the Canada Revenue Agency (CRA).
Duties of a Trustee
A trusty’s duties can be wide-ranging, depending on the type of trust they are managing and the grantor’s specifications. The tasks of a voluntary trust can be much different from that of a different kind of trust fund.
Some responsibilities include paying bills, making investment decisions, tax preparation, and distribution of assets. It is often preferred to choose someone as a trustee who understands your personal values.
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