Trusts and Estates

Lesson

Trusts and estates are legal entities that hold and manage assets for the benefit of beneficiaries.

Practice Question #1

Which of the following is a type of trust that can be modified or terminated by the grantor during their lifetime?

A) Testamentary Trust

B) Living Trust

C) Revocable Trust

D) Irrevocable Trust

Select an option above to see an explanation here.

A) Testamentary Trust: A trust created by a will that takes effect upon the testator's death. B) Living Trust: A trust created during the grantor's lifetime, also known as an inter vivos trust. C) Revocable Trust: A trust that the grantor can modify or terminate during their lifetime. D) Irrevocable Trust: A trust that the grantor cannot modify or terminate once established.

Terms

Trust:: A legal arrangement in which a person or institution (the trustee) holds and manages assets to benefit one or more beneficiaries.
Estate:: The total assets and liabilities an individual leaves at the time of their death.
Trustee:: The person or institution responsible for managing the assets in a trust according to the terms of the trust agreement.
Beneficiary:: The person or persons who receive the benefits of a trust or estate.
Testamentary Trust:: A trust created by a will that takes effect upon the testator's death.
Living Trust:: A trust created during the grantor's lifetime, also known as an inter vivos trust.
Revocable Trust:: A trust that the grantor can modify or terminate during their lifetime.
Irrevocable Trust:: A trust that cannot be modified or terminated by the grantor once established.
Grantor:: The person who creates a trust and transfers assets into it.

Practice Question #2

What is the primary responsibility of a trustee in managing a trust?

A) Maximizing investment returns

B) Minimizing taxes

C) Acting in the best interests of the beneficiaries

D) Preserving the principal of the trust

Select an option above to see an explanation here.

A) Maximizing investment returns: While this may be the trustee's goal, their primary responsibility is to act in the best interests of the beneficiaries. B) Minimizing taxes: This may be a consideration for the trustee, but their primary responsibility is to act in the best interests of the beneficiaries. C) Acting in the best interests of the beneficiaries: This is the trustee's primary responsibility, known as their fiduciary duty. D) Preserving the trust's principal: This may be the trustee's goal, but their primary responsibility is to act in the best interests of the beneficiaries.

Historical Example

In the 1920s, a wealthy individual established a trust for his children, stipulating that they would receive the income from the trust's investments but only have access to the principal once they reached a certain age. This arrangement allowed the children to benefit from the trust's assets while preserving the principal for future generations.

Practice Question #3

Which of the following is NOT a characteristic of a trust?

A) A separate legal entity

B) Owned by shareholders

C) Managed by a trustee

D) Holds assets for the benefit of beneficiaries

Select an option above to see an explanation here.

A) A separate legal entity: This is a characteristic of a trust. B) Owned by shareholders: This is a characteristic of a corporation, not a trust. C) Managed by a trustee: This is a trust characteristic. D) Holds assets for the benefit of beneficiaries: This is a characteristic of a trust.

Real-World Example

A couple with young children creates a living trust to hold their assets, including their home and investment accounts. They name themselves as trustees and their children as beneficiaries. This arrangement allows them to maintain control over their assets during their lifetimes while ensuring that their children will be provided for in the event of their deaths.