Whether you want to manage your own assets, control how your assets are distributed after your death, or plan for incapacity, trusts may help you accomplishing your estate planning goals. There are many types of trusts, each designed with a very specific purpose. While trust law is complex and establishing a trust requires the services of an experienced attorney, it’s important to at least understand the basics.
What is a trust?
A trust is a legal entity that holds assets for the benefit of another. Basically, it's like a container that can hold money or property for someone else’s benefit. Most assets including cash, stocks, bonds, insurance policies, and real estate can be held in trust. The assets you choose to put in a trust depend largely on your goals. For example, if you want the trust to generate income, you may want to put income-producing securities, dividend paying stocks and bonds. Perhaps, you want your trust to create a pool of cash that may be accessible to pay any estate taxes due at your death or to provide for your family, you can fund your trust with a life insurance policy.
When you create and fund a trust, you are known as the grantor. The grantor will name beneficiaries, who will benefit from the trust. Anyone (family, friends, etc.) or even a charitable organization can be named as a beneficiary. The trust will detail what and how much a beneficiary may receive from the trust. In some cases, a beneficiary may have access to the principal of the trust either during your lifetime or after you die. The trustee is responsible for administering the trust, managing the assets, and distributing income and/or principal according to the terms of the trust. Depending on the purpose of the trust, you can name yourself, another person, or an institution to be the trustee. You can also name more than one trustee.
Why create a trust?
Examples of how a trust can be used effectively:
- Minimize estate taxes
- Shield assets from creditors
- Avoid the expense and delay of probate
- Preserve assets for your children until a certain age
- Set up a fund for your own support in the event of incapacity
- Shift part of your income tax burden to beneficiaries in lower tax brackets
- Provide benefits for charity
- Provide support for a person with special needs while not compromising their access to important government benefits
It’s important that you discuss all of the pros and cons of setting up any trust with your legal, tax, and financial advisors.