If you’re under the illusion that you have to be Bill Gates or Warren Buffet to need a trust, you’re wrong. Your best friend who’s a mini-mogul because of the small kingdom of rental property he owns or your next-door neighbor who’s a small-business owner could – and probably do – have trusts. In the long run, a trust can be a useful estate-planning tool when it comes to protecting your assets.
Like a will, a trust is a legal arrangement created to hold and protect assets for the benefit of certain people or entities. Common objectives of a trust are to reduce the estate tax liability (if it applies in your state; some states have eliminated the estate tax provision), to protect property in your estate and, perhaps most importantly, to avoid probate or any other dealings with the court system.
Think of a trust as a special place in which ordinary property from your estate goes in and, as the result of some type of transformation, takes on a new identity and given special powers: immunity from estate taxes, resistance to probate, and so on.
Before delving too much deeper into the subject, there’s a multitude of trusts to choose from: living trusts, revocable or irrevocable trusts, family trusts, living trusts, special needs trusts, etc… Picking out a trust isn’t like walking into an ice cream parlor and choosing one of 70 different flavors listed on the board. This article will barely scratch the surface on the subject. Think of it as an ‘introduction to trusts’ lite. If you’re serious about trusts, research and investigate the matter more on your own before contacting an attorney for a face-to-face meeting to see which trust is best for you.
What can go in a trust? Almost any asset you own. The house and the cars are guarantees to go in. After that, the choice is yours to make: cash, stocks and bonds, insurance policies, real estate, collectibles and collections. The assets you choose to put in a trust will depend largely on your goals. If you want the trust to generate income, you should put income-producing assets, such as bonds, in the trust. Or, if you want your trust to create a fund that can be used to pay estate taxes or provide for your family at your death, you might fund the trust with a life insurance policy. The type of trust that would work best for you can be determined at a later time, when you set down with an attorney.
No matter the reason for or type of trust, there are certain key terms that remain the same for all of them. A settler is the person who creates the trust. That’s you. A trustee is the person who manages trust assets. Again, that can be you or a designee, such as a spouse, child or close friend.
A beneficiary is the person for whom the benefit of the trust is intended. The beneficiary could be a spouse, but in many cases, if the parents are older, the beneficiaries are the children or grandchildren.
Why would people consider a trust?
The reasons vary. John Smith owns a chain of restaurants and wants to create a trust as a way to avoid probate, but Jane Smith’s reasons are different. She doesn’t own a business or real estate (other than a house) but she has young children. What if something happens to her or her husband or, God forbid, both of them? With a trust, Jane Smith can make financial assurances for her children. The children’s inheritance or an education fund can be established and placed in the trust. Another family member or close family friend would serve as the trustee until the children are old enough to manage the assets themselves.
A trust is tailored to meet your needs. However, there are some specific requirements that need to be determined from the beginning. You must designate a trustee, as well as decide who your beneficiaries should be and what assets go in the trust. If for some reason you want to change who the trustee is, you’re allowed to change. Just consult the attorney who drew up the document to make the necessary changes.
Still on the fence whether a trust is the best thing for you? Here are a few other reasons to consider why a trust is a positive:
- Trusts minimize estate taxes (if applicable in your state. Some states have eliminated estate taxes.)
- Trusts avoid probate. Many people include trusts in their estate plans for the purpose of avoiding probate. This can be an attractive option if you have a large estate, because probate can cost 5 to 10-percent of your estate’s value, as well as take up to two years to resolve in court.
- Trusts preserve assets for children and grandchildren (and who doesn’t want to do that?)
- Trusts can fund your favorite charities.
- Trusts keep your business private. If privacy is an issue, trusts are a good estate planning option. Some people choose trusts because they don’t want their financial holdings to be common knowledge when they die.
I know what you’re thinking. Some of these goals can be accomplished outside of a trust. That’s true but often not with the same tax efficiency and certainty. Other times, these goals can only be met through the use of a trust.
The trust is a very flexible tool, if used properly and to its fullest extent. Coupled with the all-important Power of Attorney (health care and financial provisions included), a trust can be part of a complete and powerful plan to take care of a person’s needs. As with any legal document, one should enter into a trust only with the benefit of advice from legal counsel.