The world of family trusts is not just for the fabulously wealthy, the aristocrats, or the savviest of investors. Most do not know what a family trust is, and fewer still ask whether they need one.
We will cover some of the basics of trusts to help shed some light on a topic that so many people could benefit from.
A trust is an arrangement where the grantor sets aside a portion of their estate and appoints a trustee to manage it for a beneficiary. The grantor, also called a trustor or settlor, puts assets into the trust. The trustee manages what is put into the trust for the beneficiary, the individual or group of individuals for whom the grantor created the trust.
The trustee is the appointed party who administers the property and/or assets in a trust and handles them in a way they see fit. However, a trustee is also the fiduciary and has legal and ethical responsibility to make decisions as outlined in the trust that benefits the beneficiary.
Is that too complicated? Imagine this instead.
The grantor has a giant gift bag where they store many presents for recipients (beneficiaries) on a list. The grantor then picks a Santa (the trustee) who will follow directions on managing the gifts in the bag. This Santa also manages when to give gifts to the recipients.
A trust is something that can help any person who wants to manage how they leave their assets to their family. These assets can be anything including, but not limited to, investments, property, and other belongings. And, they do not have to be worth millions of dollars.
Trusts help people gain control over who gets what and at what time. In short, the division of a trust’s contents is decided so there is no question about who will receive what.
A grantor may require beneficiaries to prove themselves ready or worthy to handle their inheritance. For example, a grandparent may leave money for their grandchild that they will receive upon graduation from college.
Other grantors may not fully trust the beneficiaries to act in their own best interests. Or they may not fully trust the spouses of the beneficiaries. A trust would help ensure that the assets held in the trust will provide specific aid to their loved ones.
This can help ensure that your assets go exactly to the ones you want them to go to.
The devil is in the details. Family members often end up fighting over the small things such as collectibles, jewelry, or perhaps an antique they have been eyeballing for years. Why not cease the squabbling before it begins?
People often ask what kind of trust is best for them. The short answer is that it depends on what you want.
Trusts are like vehicles. Many different vehicles can get you where you need to go, but each one may take you on a very different journey. Each one has its advantages and disadvantages.
To continue with the vehicle motif, trusts are also customizable. One would not want to start customizing a vehicle without the expertise required to do so properly. Trusts are the same, and an expert may also provide you with other options you never knew were available.
In general, the two main types of trusts are living trusts and testamentary trusts (see below). Living trusts are created when the grantor is still alive, and testamentary trusts are created through the grantor’s will.
Let us take a look at some varieties of trusts to illustrate just how different they can be. However, remember that there are many more than the kinds listed here, many variations of these, and even more types that aren’t even mentioned.
As a caveat, the trusts listed below may have different names based on where they’re created. The important points to keep in mind are what the trust can offer you, not its name.
Revocable trusts are quite possibly the most common of the trusts. How do they work?
Let us return to our Santa and gift bag analogy. As the grantor, you fill the gift bag but may choose to appoint yourself as Santa (trustee). This allows you to control assets even though they now belong to the trust.
Revocable trusts are the best way to shift control of assets in the trust to the appropriate beneficiary. It keeps things private by avoiding probate, court proceedings where one presents and proves the validity of documents and others can contest. They provide asset protection for beneficiaries after your death if they are correctly structured.
However, there are downsides to a revocable trust as well. A revocable trust will not provide asset protection for you while you are alive. The trust does not protect the assets from seizure or taxation.
Furthermore, the cost is another downside to a revocable living trust. They are more expensive to set up, and additional changes will also cost more money in legal and consulting fees.
The bottom line is that they will allow more freedom to manage the assets, help you avoid probate, but can be more expensive as you make changes.
Continuing with the Santa and gift bag analogy, while you may keep the bag open, remove items, and add items with the revocable trust, you cannot with an irrevocable trust. The grantor fills the bag, ties it closed and writes up instructions for Santa regarding the gift bag. No one can alter the bag or its contents without the named beneficiary or beneficiaries’ permission.
Assets now belong to the trust and are protected from taxation. Beneficiaries benefit from the trust but are the property holders; the trust owns the assets. This allows them to receive benefits they may not have qualified for otherwise.
The grantor instructions may also dictate which assets beneficiaries receive and when they receive them. They may have to meet various criteria such as turning a certain age, graduating from college or getting married.
Irrevocable trusts are more complex to set up than revocable trusts. Seek financial advice and legal counsel to ensure that the trust will work as you intend it to.
Some senior citizens may require a great deal of medical care. In America, if you have the assets to pay for such care, you must pay for it, and it can get expensive depending on your conditions. If that’s the case, you can create a special trust to pay for the care.
This is a form of an irrevocable trust that would be a good addition to your retirement checklist. As such, the assets in the trust are not legally yours even though you reap the benefits. The trust is also usually designed to pass on the assets to another beneficiary when the original beneficiary passes away.
Some parents have raised special needs children. These children often receive benefits from the government. As such, they may no longer qualify for those benefits if they suddenly receive all of the assets in a trust.
This type of trust ensures that those with special needs will receive both support from the trust and still qualify for governmental benefits.
The terms of a testamentary trust are in the grantor’s will. Upon death, the assets go into a trust as instructed by the will. The executor may then funnel assets into an existing trust or a trust created upon the grantor’s death.
Some parents may leave their assets to their children in this way. If their children are minors and are incapable of managing the assets, the appointed trustee will manage the assets until they are ready. As mentioned previously, grantors may write in certain criteria that must be met before beneficiaries are deemed ready to receive full control of the assets.
Testamentary trusts will also go through the probate process. But what is the problem with the probate process for wills and testamentary trusts?
Imagine that you have just passed away, and now, instead of grieving for you, your loved ones, your intended beneficiaries have to deal with legal proceedings. They are dragged through the long process over months, maybe years. And worse, they may not be benefiting from the assets you intended for them that whole time!
With living trusts, you go through this process while you are able to grant the clarity of purpose in handling your estate. When you are gone, they can mourn without needless interruption, and you will know they will be secure because you made it so.
If you have read until this point, you will have some idea as to how you and your loved ones may benefit from setting up a trust. Death and taxes come for us all, but shying away from unpleasant topics will not lessen their impact. Take action.
Learn how your spouse and heirs could have been negatively impacted if your estate plan hasn't been updated to reflect the new laws. Find out what the new regulations did to open 6 estate planning "wormholes" in our downloadable PDF.Remember that trusts are not just for when you pass away. You can reap their benefits while you are still alive and vibrant enough to enjoy them to their fullest. Call us today and let us help you navigate the hard parts of trusts so you can enjoy the good parts.
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