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What Is the Definition of a Beneficiary Trust?

You should not confuse a beneficiary trust with the beneficiary of a particular trust. A beneficiary trust is a tool or entity of asset management. This kind of trust is irrevocable in nature, so the grantor does not have the power to cancel or change it once the trust is created. The grantor does not have the ability to make investment decisions related to the trust; instead, this power is transferred to the beneficiary. It should be noted that the grantor after assigning assets to a beneficiary trust, the grantor cannot maintain any control over or utilize the trust property or the trust will not qualify as an irrevocable trust.

The main idea of a trust is to build an imaginary legal person who will protect, manage, and hold all your private property so that your heirs may benefit. In a beneficiary trust, assets are transferred by the creator of the trust into the trust for the gain of the beneficiaries. This type of irrevocable trust provides a grantor with a way of giving property to another person, while at the same time, protects the assets from lawsuits, income taxes, estate taxes, and loss due to divorce. By this trust, the beneficiaries are allowed to make and profit from investment decisions for the trust and benefit from the fact that there is no requirement to pay income tax on the income of the trust. 

In a beneficiary trust, tax is handled in a unique way. Any asset or property within the trust is owned by the trust instead of by an individual. This trust is not subject to any kind of estate taxes upon the death of the grantor or the beneficiary. This trust also protects the beneficiary from income taxes. In most cases the grantor of the trust is the person who is considered the owner and is subject to the jurisdictional income tax laws.

Assets in a beneficiary trust are not subject to claims in divorce because no individual owns the assets. The same rule applies for creditors. The beneficiary cannot be held responsible for any unpaid debts or lawsuits because the beneficiary does not have any ownership in the assets of the trust.

Although the beneficiary is not considered the asset’s owner, he or she is capable of deciding how and when to make decisions about assets and investments in the trust. The beneficiary can even begin a business through the trust and benefit from it, while still maintaining the asset protection afforded by the trust.

  • Published: May 30, 2024
  • Updated: Dec 26, 2023
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This FAQ is for informational purposes only and does not constitute legal advice. We make no representations or warranties about this FAQ's completeness, accuracy, reliability, or suitability. Each legal situation is unique. Always speak with a licensed attorney for personalized guidance.

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