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In a beneficiary trust, the trust’s creator transfers assets to the trust for the use of his beneficiary. This irrevocable trust provides a way for a grantor to give assets to another person while protecting those assets from loss due to divorce, lawsuits, estate taxes, and income taxes. This type of trust allows the beneficiary to make investment decisions for the trust and benefit from the results of such decisions but doesn’t require him to pay income taxes on the trust’s income.
A beneficiary trust should not be confused with a beneficiary of a trust. A beneficiary trust is a type of asset management tool or entity. A beneficiary of a trust is usually a person who receives the benefits of a trust. In some cases, however, a beneficiary of a trust can be a company instead of a person.
When someone creates a beneficiary trust, he relinquishes the right to control the assets or make decisions for the trust. This trust is irrevocable. Once it is created, the grantor cannot change or cancel it. He gives up the right to make investment decisions for the trust, transferring that right to the beneficiary.
Taxes are handled in a unique manner with a beneficiary trust. Any property and assets within the trust are considered owned by the trust rather than an individual. As such, the trust is not subject to estate taxes when the grantor dies or when the beneficiary dies. The beneficiary of the trust is also protected from income taxes. In most cases, it is the grantor of the trust who is considered its owner and subject to his jurisdiction’s income tax requirements.
Since the assets in a beneficiary trust are owned by the trust rather than an individual, they are are not subject to loss in a divorce. The beneficiary of this type of trust doesn’t actually own the assets, so a spouse cannot take part of them in the event of a divorce. The same goes for creditors or anyone else who might decide to sue the beneficiary. The beneficiary doesn’t have any property interest in the trust’s assets, so they cannot be seized because of lawsuits or unpaid debts.
While the beneficiary of this type of trust isn’t considered the owner of the property within it, he does have the right to make decisions for the assets. He can decide when and how to make investments for the trust. He can even start a business for the trust and benefit from that while maintaining all of the asset protection the trust affords. The trust’s assets aren't vulnerable to business liability suits.
The money and assets in a beneficiary trust can be passed on to the original beneficiary's children or anyone else for whom he’d like to provide money and property. He can create separate beneficiary trusts for his beneficiaries in order to pass the original trust's assets along after his death. These trusts would also be protected from estate taxes.