Trusts, Estates & Financial Instruments Flashcards

What is the primary purpose of a trust in asset protection?

Answer: Shield assets from liabilities

The primary purpose of a trust in asset protection is to legally separate assets from the individual's direct ownership, thereby shielding them from potential liabilities like lawsuits, creditors, or judgments. By transferring assets into a trust, they are no longer considered part of the grantor's personal estate, making them more difficult for creditors to access.

Which type of trust becomes effective only upon the grantor's death?

Answer: Testamentary trust

A testamentary trust is a type of trust that is created and becomes effective only upon the death of the grantor, as specified in their will. Unlike a living trust, which is established and funded during the grantor's lifetime, a testamentary trust is activated through the probate process after the will is validated.

Which document specifies how assets are distributed after death?

Answer: Will

A will is a legal document that specifies how an individual's assets and property should be distributed after their death. It allows the testator to name beneficiaries, designate an executor, and make provisions for guardianship of minor children, ensuring their final wishes are carried out according to their instructions.

What is a key benefit of using financial instruments like annuities?

Answer: Tax-deferred income

A key benefit of using financial instruments like annuities for asset protection and retirement planning is their ability to provide tax-deferred growth. The earnings within an annuity are not taxed until they are withdrawn, allowing the investment to grow more rapidly over time and providing a structured income stream in retirement.

Who manages the assets in a trust?

Answer: Trustee

In a trust, the trustee is the individual or entity legally responsible for holding, managing, and distributing the assets according to the terms outlined in the trust agreement. The trustee acts as a fiduciary, meaning they must manage the assets in the best interest of the beneficiaries.

Which of the following helps avoid probate?

Answer: Living trust

A living trust, also known as an inter vivos trust, is a legal arrangement that allows assets to be transferred into the trust during the grantor's lifetime. A significant benefit is that assets held in a living trust typically bypass the probate process upon the grantor's death, allowing for a quicker and more private distribution to beneficiaries.

What type of account allows tax-deferred growth for retirement savings?

Answer: IRA

An Individual Retirement Account (IRA) is a retirement savings plan that offers tax-deferred growth on investments. Contributions to traditional IRAs may be tax-deductible, and earnings grow tax-free until withdrawal in retirement, making it an effective tool for long-term savings and asset accumulation.

Which legal role involves carrying out a deceased person’s will?

Answer: Executor

An executor is a legal role specifically designated to carry out the instructions outlined in a deceased person's will. They are responsible for managing the estate, paying debts, and distributing assets according to the will's terms. This role ensures that the deceased's final wishes are legally honored and executed.

What does diversification help achieve in investment planning?

Answer: Spread investment risk

Diversification in investment planning involves spreading investments across various asset classes, industries, and geographies. Its primary purpose is to mitigate risk by reducing the impact of any single investment's poor performance on the overall portfolio. This strategy helps to stabilize returns and protect against significant losses.