While many people know and understand the importance of having a will, more people should know that personalizing your estate plans and reducing tax payments for your beneficiaries is achievable with a trust.
A trust is a valuable part of estate planning to ensure that a person’s assets get legally bequeathed to specific beneficiaries. Once a trust fund has been created, assets can be placed inside, and an authorized trustee can administer them.
While this may sound similar to a will, a trust is a separate legal entity with distinct rights – much like a person or business. To unpack and understand trusts in more detail,
Table of Contents
Read these ten things that everyone should know about trusts:
Purpose
The purpose of the trust should be established in advance because the rules applicable will depend on the terms on which it was created. Trust funds date back to the feudal period when people were given land and granted protection by higher-ranking people in exchange for working and fighting for them.
Consider the purpose of setting up your trust and tailor it towards those goals. For example, you can set up a trust to help pay for your grandchildren’s education one day when they are ready to apply to universities.
Not Just for The Wealthy
While a trust fund is a complex financial and legal entity, establishing one is not reserved for the wealthy alone.
It does require expert advice and legal counsel from a trust attorney, but they are the only way to provide greater flexibility for asset and real estate management after your passing. Distributing assets and allowing for provisions such as decanting or asset management are benefits many people can benefit from – not just the top 1%.
Revocable
Revocable trusts are established for the benefit of the creator during their lifetime. These trusts allow the grantor to change instructions, remove or add assets, or terminate the trust entirely.
Revocable trusts (also known as living trusts) solve several problems associated with estate planning that wills cannot. These trusts can help to manage and protect assets, but they do not avoid estate tax because keeping the power to amend them causes them to remain includable in your overall estate.
Irrevocable
The purpose of establishing an irrevocable trust is to transfer assets away from the grantor’s control and into that of the named beneficiary.
That means a reduction in the value of the estate, for tax purposes, and it protects the assets from creditors. Irrevocable trusts, as the name suggests, cannot be modified or terminated without the permission of the beneficiary – or a court order.
The tax rules applicable to these trusts can vary between jurisdictions and states, so get advice from your lawyer regarding the specifics.
These are not intended for you to transfer debt into a trust. You must be careful with how and why you transfer assets – particularly if you have recently or intend to file for bankruptcy.
Trusts & estates
Asset Protection
The terms of a trust can all be specified in detail – if they are legal.
That can help to protect assets after a divorce, control the inheritance your children receive, and even dictate how your money gets spent. Trusts can be crafted to protect assets from family members who might otherwise squander them.
Irrevocable trusts are also designed to protect assets when a grantor goes into a care facility, keeping certain assets untouched.
Confidentiality
Trusts do not have to go through probate, so apart from saving money on probate taxes, it also means that it will not form part of the public record.
Confidentiality is crucial if you have complex requirements or would like to disinherit someone. Trusts require specific language to be legally upheld – if the terms set out therein are not clear, the trustee could get challenged later in court.
Flexibility
When setting up a trust, you must understand that one size will likely not fit all.
While you probably know how you would like your assets to get distributed after your passing, you likely will not know the best way to do that. Trusts are the way to go because they offer flexibility and can be structured to suit your needs.
You may not realize this, but there are several types of trusts, each with its purpose, benefits, and drawbacks.
Access
Many people wrongly believe that money in a trust will be tied up for months (and even years) following the passing of a loved one.
While access to money and assets in a trust can be limited, depending on the terms of the trust – if all trustees agree for money to be released, they can be without any unnecessary hold-ups.
Tax and Trusts
The type of trust you set up will determine how it is taxed.
The assets within the chosen trust will likely be subject to inheritance tax, often at the time assets are placed into it or transferred out. There is also typically a tax payable when the trust hits its 10th anniversary of being created – or when it ends.
Income tax is often payable by trust beneficiaries on any money they inherit. The type and amount of tax due could be complex, so it is always best to consult a professional.
10 Trustee Nomination
A trust needs to be managed by a trustworthy individual, much like the name suggests.
Even the most well-intentioned individuals can find themselves facing unfortunate times that put their assets at risk, so consider your trustee nomination carefully. Most people choose a friend or family member, but often it is a better idea to nominate a professional trustee, such as your accountant or lawyer.
An ideal trustee should be financially astute and familiar with the basic concepts of a trust fund. They do not need to be a financial or legal guru, but they need to be smart enough to make decisions on your behalf when you are no longer walking the earth.
In summary
Take your time to make these decisions – but keep them a priority. Setting up a trust does not have to scare you, but you should take it seriously.
