Sometimes, when handling assets, you hear the suggestion of putting the money into a trust. These can be complicated, but they can also be an invaluable tool to ensure that your assets are distributed the way you want.
But there are several kinds of trusts and various rules, so the best choice of action is to consult with a financial advisor to get started.
What Is A Trust?
Specifically, a trust is a legal arrangement where the person creating it, the grantor, puts their assets in the name of the trust, for the benefit of someone called the beneficiary. Like a gift, the money no longer belongs to you. Unlike a gift, you maintain some control. A third party, the trustee, is authorized to administer the assets to the beneficiary on behalf of the grantor. With a trust, you have absolute control over when someone receives your assets or even how the money you leave behind can be spent.
The primary benefit many find appealing is that trusts don’t go through probate when you pass away, so your assets won’t end up tied up in the court system for months on end. Probate is usually public record, so avoiding this also means protecting your privacy and that of your beneficiaries.
For an additional advantage, the money in an irrevocable trust doesn’t legally belong to either you or the beneficiary. That means you can remove it from your assets for tax purposes, but the beneficiary doesn’t lose student aid or disability payments. Only when they receive a disbursement do they owe any taxes.
The main disadvantage is the time and money required to set it up. You definitely need an estate attorney to manage the paperwork and get your assets transferred, which costs at least a few thousand dollars. Unlike a will, the beneficiaries find out what they receive from you while you’re alive, which can then lead to some uncomfortable situations.
Living or Irrevocable?
There are two main types of trusts:
- Living trust, also known as revocable
- Irrevocable trust
Living trusts can be changed as long as you are alive, with the physical and mental capacity to make it happen. You can even make one for yourself, in the event where you are unable to care for yourself in the future due to a debilitating disease.
Irrevocable trusts are permanent as soon as the ink dries. The main benefit of this is that you can reduce estate taxes if your state has them, since the assets contained in an irrevocable trust no longer belong to you, but to the trust.
There are also several types of specialized trusts, pertaining to educational expenses, charitable causes, financial use and much more. You can protect funds for a special needs adult with a special needs trust, keeping them from losing benefits. A trust can be tailored to whatever you need.
What To Know
Trusts and wills are different aspects of a good estate plan. Having one does not necessarily cancel the need for the other. Trusts are fiduciary relationships which become active immediately, while wills are legal documents which become active upon your death. Wills always go through probate but trusts do not. You and your financial advisor will be able to determine which of these you need.
Anyone can be a trustee, including yourself as previously mentioned. If you are only going to name one trustee, however, you should also name one successor trustee, in case something happens to your primary trustee. If you don’t want to name any family members or friends as trustees, you can also select a bank or a trust company. What is most important is that you have faith in their skills to execute your wishes faithfully.
Trustees do not necessarily need an attorney but may need to consult with one from time to time. This can also be something you set up within the original terms.
Sound Advice for Your Estate Plan
Understanding the different types of estate tools available to you is crucial to making the right choice. While most people should have a will, a trust isn’t right for everyone. Contact us to find an experienced financial advisor who can help you decide.