Fully understanding the concept of trust accounting would involve knowing the types of trust accounts there are. Although there are a vast number of trust accounts, our focus is on the four major and most important trust account types.
Revocable trust, also know as living trust is a type of trust account that can manage a settlor’s assets in his or her lifetime. The settlor of a trait is the person who is starting or has established the trust. It is an arrangement whereby the settlor retains the rugby to rescind the trust and regain control of the trust assets. The settlor can benefit (i.e be a beneficiary) from the trust and can decide to revoke the trust relationship. He or she is also within the right to dissolve the trust at any point. This type of trust structure doesn’t protect a person’s assets from creditors and if a creditor has laid claim to an asset, a trust can’t be opened to protect that asset. A revocable trust becomes irrevocable following the passing of the settlor.
Irrevocable trust. With this type of trust account, a settlor doesn’t retain any rights to alter or revoke the trust agreement. The moment an irrevocable trust is drawn up, the settlor no longer is the legal owner of the trust assets, it goes to the trustee. And it is the trustee who makes decisions on tax payments. The trustee takes up the responsibility of managing the trust assets and paying the taxes that arise with them. Generally, an irrevocable trust offers greater asset protection from a settlor’s creditors than the revocable trust account.
Fixed trust. This type usually comes up after you’ve decided if you want a revocable or irrevocable trust account to be established. It is a type of trust whereby the trust assets are distributed amongst the beneficiaries at a certain time or in certain amounts. Terms of the distributions of trust assets are usually clearly stated in the trust documentation. The settlor can decide to put age restrictions or conditions to be met before distribution can occur, in the trust documentation. With this type of trust, the settlor’s wishes are clearly stated and adhered to.
Discretionary trust. With this trust account, the settlor leaves distribution in the hands of the trustee. This means that with this type of trust account, the trustee has the right to distribute the trust assets according to the general welfare of the beneficiaries or use his own discretion. This privilege would be clearly stated in the trust documentation. Although the settlor can makes his/her wishes known in the documentation, the trustee is not bound by them and can ignore them.