A trust is a document that sets up very specific rules about how property and assets that have been put into the trust are to be distributed and managed. Setting up a trust is not sufficient – you must fund the trust as well. This simply means that things need placed in your trust to make it useful. For example, life insurance policies, retirement accounts and property should be in a trust. They must be transferred into the trust’s name to make the trust document useful after your passing.
Who Should Set Up a Trust
Trusts are powerful tools for individuals and families with substantial assets. They give you greater control on how and to whom you pass your wealth on to after death. There are different types of trusts, each with different goals. It’s best to discuss your individual needs with a financial advisor and an elder law or estate attorney.
Even if you don’t think you have enough money for a trust, if you want security in knowing you have complete control over your assets you should have a trust. A trust gives you control over how, when and to whom your assets are distributed after you’re gone. It can even give you control for multiple generations. Now who doesn’t want that?
Advantages of a Having a Trust
The advantages to having a trust document carefully drafted by an elder law or estate planning attorney are plentiful. Without this appropriate documentation, you and your heirs may not reap the benefits and advantages of having trust, as discussed below.
One advantage is efficient and private wealth transfer. Setting up a trust ensures that your heirs have access to their inheritance in a timely fashion. When you transfer wealth via a will, your estate will be settled in probate and can be tied up for a lengthy period of time.
It also costs your estate money by going through probate. The percentage depends on the state but it is to your advantage to have your wealth transfer through a trust. Also, when your estate goes through probate it becomes a matter of public record. This can create undesirable scrutiny and attention from other members of your family that may want a piece of your estate pie.
Another advantage is reducing estate taxes for couples that are married. For couples that are married, it may make sense to set up a revocable trust to take advantage of estate tax exemptions. When the first spouse passes, the wealth in a revocable trust can be used to fund a family trust in the amount not to exceed that spouse’s estate tax exemption.
The assets in the trust will not be subject to estate taxation at the death of the surviving spouse. A marital trust can also be set up and works in much the same way. Of course, you should consult an attorney and financial professional to determine which would be most beneficial for your situation.
Another advantage is greater control over your assets after death. Trusts are sometimes referred to as a way to control your wealth from the grave. This means you can specify how and when your assets are distributed to your heirs through subsequent generations, including grandchildren and great-grandchildren.
You can also ensure that your retirement is preserved and distributed as you had intended. You may be worried that a beneficiary will settle a retirement account and sustain a large income-tax fee in that year as a result. However, if you name a trust as the beneficiary of a retirement account, then the trustee can limit withdrawals to minimum required distributions in accordance with the retirement account.
Finally, keep your wealth within your family. You may be anxious that if your surviving spouse remarries, your assets might end up spent on their new spouse and family. A trust can be used to be responsible for your surviving spouse while also safeguarding that the rest of the trust’s assets are conveyed to the beneficiaries you’ve chosen.
Types of Trusts
There are essentially two types of trusts relevant to families and their children. These types of the trusts are explained below. It should be noted that this list is certainly not exhaustive. There are numerous other, more complicated trusts available based on your needs and desires.
One option is a living trust. A living trust is drafted and funded while you are still alive. A living trust can be either revocable or irrevocable. However, in order for you to properly manage your assets within the trust most often a living trust is revocable.
A revocable living trust allows you to make changes to the trust, add or transfer assets out of the trust, or terminate the trust altogether. An irrevocable trust does not allow for such flexibility.
Another option is a testamentary trust. A testamentary trust is created through a will or trust that only becomes effective after death. Testamentary trusts are typically created when and if there are minor children or people with disabilities that become heirs and may not be capable of making their own financial decisions. Testamentary trusts remain effective until they expire which is outlined in the trust.
For example, common terms are when the heir marries, reaches 30 years of age, graduates from college, etc. It’s important to choose someone as trustee that you trust to make the best decisions for your children or heirs. However, once the trust expires, the funds pass on to your heirs.
This article is not meant to be an exhaustive explanation of trusts nor should it take the place of sound advice from a financial advisor and attorney. Trusts can be very powerful tools to help preserve your wealth for many generations. However, that is true only if they are drafted and funded properly. That is why it is so important to entrust your legal and financial affairs to professionals you trust. Knowledge is power. The more knowledge you have, the more informed decisions you can make.
Updated: March 25, 2014