• Trusts can be very beneficial to an individual if he fully understands how such financial tools work.signing a contract image by William Berry from Fotolia.com
  
  Trust agreements are a widely used financial tool, but are not very well understood by most people. Trusts have an inappropriate stigma attached that says these tools are only for the wealthy. However, as people own more and more assets and the government is looking for ways to tax those assets, including a hefty estate tax, trusts are ways in which individuals can shelter their assets for use by future generations and protect themselves from excessive taxes.
  
  

What are the basic requirements of a trust agreement?

• Trust agreements must have five basic parts. First, there must be a grantor--the person who wishes to set up the trust and donates the assets into the trust. Second, there must be a trustee--the person or institution who manages the assets in the trust. Third, those who will benefit from the trust (the beneficiaries) must be clearly laid out in the agreement. Fourth, the trust must have a corpus--the actual assets in the trust. Lastly, there must be terms laid out in the agreement that give the trustee powers and dictates how the trust will be administered throughout its duration.
  
  

What is the purpose of a trust agreement?

• Trust agreements serve many purposes and there is a different type of trust for whatever purpose the grantor wishes to achieve. Trusts can shelter the grantor or the grantor's estate from income and estate taxes. In addition, trusts are put in place for the security of future generations. Some trusts are set up for the purpose of scholarships, grants or for a charitable organization. Other trusts are set up for handicapped children or for those who would be considered spendthrifts.
  
  

What is the difference between a revocable and irrevocable trust?

• The main, and most widely seen, classification of trust agreements is whether it is revocable or irrevocable. Revocable trusts are often called "living trusts" and can be changed at any time should the needs or wishes of the grantor change. These trusts do not protect the grantor from estate taxes because the grantor retains the right to change the agreement, and therefore, never technically gives up ownership. Irrevocable trusts are the exact opposite--the grantor loses the right to alter the document. Consequently, the assets in the trust are not technically in the grantor's ownership anymore and are not included in his gross estate. Therefore, irrevocable trusts are able to reduce estate-tax liability.
  
  

Who can be the trustee?

• The trustee can be just about anyone. Many times a family member or close friend is designated as a trustee. Large financial institutions are also frequently named as trustees. Most large banks have a trust department that can manage and protect the assets.