Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Passive Trust

What it is:

Also called a dry trust or a naked trust, a passive trust is a trust into which a person transfers assets in order to pass them on to heirs or beneficiaries.

How it works (Example):

For example, let's say John Doe is in a shaky marriage and wants to make sure $1 million of his money goes to his children rather than his second wife, whom he many divorce. He puts the money in a passive trust for his children.

The children are only 10 and 8 years old, but when they turn 18, they will have access to and control over the assets. In the meantime, John's wife cannot touch the assets, and a trustee manages the money on behalf of the children rather than on behalf of John Doe.

Why it Matters:

Passive trusts are a way to ensure that beneficiaries receive assets as intended, but they also mean that the benefactor gives up control over the assets. Additionally, age is typically the only condition of a passive trust, meaning that the trustee can't withhold funds from the trust if, say, John's children do something of which he disapproves, such as dropping out of college. The children simply must be at least 18 years old to obtain full control over the money.