What are Trusts?


A trust is an agreement for one party to care for the assets of another party for the benefit of a third party. In essence, it is a business agreement. The person creating or the original owner of the assets is referred to as the Grantor. The party that will take care of the assets is known as the Trustee. The third party to receive the benefits is referred to as the Beneficiary.

The most common assets transferred to the care of the trustee are cash and real estate. The trustee holds control over the assets and in accordance with the agreement transfers the assets to the beneficiary based on the terms designated in the agreement. The agreement is commonly referred to as the Trust Document.

We have all heard the crazy stories of trusts being set up to take care of pets or some other off the wall goal. The reality is that most are established to take care of individuals that cannot or will not be able to make good decisions. These could be due to age – minors or elderly, mental capacity or to protect the assets from outside creditors. All of these are legitimate justifications for the creation of a trust. There are some scenarios where the trust is established to benefit an organization, but that is for another article in the future.

To create a trust, first the grantor must decide if (s)he would like to change the terms of the trust document in the future (create a living trust). This is critical to understand, if the grantor retains the right to make changes, in effect he has not given absolute permission for a formal entity to exist. In effect, he can revoke the rights or terms and conditions to the agreement. This is referred to as an Revocable Trust. This is very common and there are thousands of these types of trusts out there. Since the grantor retains the right to make changes, no new legal entity exists. Therefore, the trust is merely a shadow of something that may or may not exist in the future. This type of situation has no existence in the eyes of the Internal Revenue Service and therefore is not taxed nor does it require its own Federal Identification Number (FEIN).

Many of these revocable trusts have a trigger in them causing the trust to become permanent. The most common trigger is the death of the grantor. Others include permanent disability or lack of capacity on the grantor to make decisions. Once the trigger is engaged, the trust goes into action. It then becomes unchangeable or permanent in nature and is called an Irrevocable Trust. This automatically creates a new entity and this entity no differently than when a baby is born, must get an identification number from the IRS. This new entity files an annual tax return Form 1041 (notice that an individual is Form 1040) and must conduct itself in accordance with the procedures as outlined by the IRS. See Resources for more information on trusts from the IRS. 

In some situations, the Trust must become an entity in the state where it conducts business. In many situations a minimum of registering the name of the trust is required in the state where the trust operates.

The trustee now takes over and controls the assets and is paid from the trust for caring and distributing the assets in accordance with the terms and conditions in the agreement (Trust Document). 

There are hundreds of different types of Trusts and they are taxed in accordance with the Code. If you have any questions please contact me via the comment section below and I’ll get back to you as soon as possible. Act on Knowledge. 

Value Investing

Do you want to learn how to get returns like this?

Then learn about Value Investing. Value investing in the simplest of terms means to buy low and sell high. Value investing is defined as a systematic process of buying high quality stock at an undervalued market price quantified by intrinsic value and justified via financial analysis; then selling the stock in a timely manner upon market price recovery.

There are four key principles used with value investing. Each is required. They are:

  1. Risk Reduction – Buy only high quality stocks;
  2. Intrinsic Value – The underlying assets and operations are of good quality and performance;
  3. Financial Analysis – Use core financial information, business ratios and key performance indicators to create a high level of confidence that recovery is just a matter of time;
  4. Patience – Allow time to work for the investor.

If you are interested in learning more, go to the Membership Program page under Value Investing section in the header above. 

Join the value investing club and learn about value investing and how you can easily acquire similar results with your investment fund. Upon joining, you’ll receive the book Value Investing with Business Ratios, a reference guide used with all the decision models you build. Each member goes through three distinct phases:

  1. Education – Introduction to value investing along with terminology used are explained. Key principles of value investing are covered via a series of lessons and tutorials.
  2. Development – Members are taught how pools of investments are developed by first learning about financial metrics and how to read financial statements. The member then uses existing models to grasp the core understanding of developing buy/sell triggers for high quality stocks.
  3. Sophistication – Most members reach this phase of understanding after about six months. Many members create their own pools of investments and share with others their knowledge. Members are introduced to more sophisticated types of investments and how to use them to reduce risk and improve, via leverage, overall returns for their value investment pools.

Each week, you receive an e-mail with a full update on the pools. Follow along as the Investment Fund grows. Start investing with confidence from what you learn. Create your own fund and over time, accumulate wealth. Joining entitles you to the following:

  • Lessons about value investing and the principles involved;
  • Free webinars from the author following up the lessons;
  • Charts, graphs, tutorials, templates and resources to use when you create your own pool;
  • Access to existing pools and their respective data models along with buy/sell triggers;
  • Follow along with the investment fund and its weekly updates;
  • White papers addressing financial principles and proper interpretation methods; AND
  • Some simple good advice.

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