Trusts have long been thought of as an inheritance tool meant only for the super wealthy, thanks to the “trust-fund baby” stereotype in Hollywood movies. But, you don’t have to be a Hilton, Kardashian, or Richie Rich’s parents to set up a Trust. Anyone who wants to leave precise instructions on how their assets should be managed after they’re gone can set up a Trust.
A Trust can be a tool to manage the wealth you’ve built — helping the people, causes, and organizations that have meant the most to you during your lifetime. To establish a formal Trust, the first step is to speak with a financial professional or an estate attorney to review your options.
Here are five things you should know about Trusts before you start estate-planning.
1. There are three key parties involved in a Trust.
A grantor is the person who establishes the Trust and decides what property will be put into the Trust. Trusts can hold anything: cash, savings accounts, stocks, property, collectables, other investments — whatever you decide you want to leave to your beneficiaries.
Existing bank and investment accounts can be placed in a Trust once the Trust is established. New account(s) can be opened in the name of the Trust.
The trustee is the person(s) or entity who manages the Trust — sometimes for a fee — until its purpose has been achieved. The trustee has a fiduciary responsibility to oversee the Trust and ensure the guidelines established by the grantor are followed. Essentially, the trustee is legally obligated to be honest and trustworthy. Any action the trustee takes must always stay true to the instructions in the Trust agreement, even after the grantor’s death.
A Trust is created for its beneficiary. At some point, the beneficiary will receive proceeds from the Trust in accordance with its terms. The beneficiary may be a person — a child, grandchild, family member, or others — but it can also be a charity or business.
2. Setting up a Trust can be an emotional part of your estate-planning process.
No matter how much money you have, we all share at least one thing in common: We all want our loved ones to be well taken care of after we’re gone. Planning for the unexpected can help ease your mind when it comes to the future of your loved ones. Thinking about your own death is difficult, but necessary. Thankfully, Trusts exist to make sure your final wishes are granted.
3. There are two main types of Trusts: Revocable vs. Irrevocable
When it comes to Trusts, grantors can get as specific as they want: Land Trusts, IRA Trusts, Qualified Personal Residence Trusts, Charitable Trusts, etc. But all Trusts are one of two types: revocable or irrevocable.
With a Revocable Trust, the grantor controls the Trust’s assets during their lifetime. They can add to or remove property from the Trust, change its beneficiaries, and even dissolve it.
The specifics of an Irrevocable Trust are less flexible. Sure, you can modify or, in some circumstances (which vary by state), dissolve it — but it can be much more difficult.
Aside from the finality of Irrevocable Trusts, the main difference between Revocable and Irrevocable Trusts involves taxes. Assets in Revocable Trusts are still considered the grantor’s property, so they continue to pay taxes on the income generated by the Trust assets, and the Trust assets are still considered part of the grantor’s estate for estate tax purposes. Irrevocable Trust assets are generally no longer considered part of the grantor’s estate and any income or capital gains taxes owed on Trust assets are paid by the Trust. By removing assets from the grantor’s estate, an Irrevocable Trust can help reduce or avoid estate taxes at the grantor’s death.
4. Trusts can help you avoid probate.
One reason some people prefer Trusts is so they can avoid probate. Probate is the judicial court’s process of deciding upon the validity of a public document. Avoiding that process is one less step that has to happen before your assets can be distributed as you intended.
Any assets included in a Trust do not need to go through the probate process, as long as the assets were added before the grantor’s death.
5. Trusts can help you control your assets.
Do you ever dock your kid’s allowance because they forget to take out the trash? Instead of giving them the full $10, you only pay them $8. And if they don’t do any of their chores, you give them zip.
Allowances serve as an incentive. If your child does X, Y, and Z, you’ll pay them handsomely (for a 7-year-old, anyway). Similarly, Trusts can allow the grantor to control the assets long after they’re gone.
While some Trusts are set to allow the trustee to make withdrawals from the Trust for distribution to beneficiaries, others are set up with strict rules and restrictions determined by the grantor.
Examples of different distribution plans and provisions include:
- Annual distribution: The beneficiary receives a certain amount from the Trust each year.
- Tiered distribution: The beneficiary receives X% at age 18, Y% after graduating college and Z% after turning 35.
- Specific provisions: The grantor wants the beneficiary to only spend the money on something specific, like education (tuition), travel, or starting a business.
- “Spendthrift” clause: The beneficiary can’t transfer rights to future payments from the Trust to a third party (effectively preventing the beneficiary from squandering the inheritance before they receive it and protecting the assets from the beneficiary’s creditors).
Distribution plans and provisions help the grantor ensure the money, and, in some cases, may also be a way for concerned parents to provide for their children while also limiting how the money is used (think: not on things like expensive cars or gambling).
Ready to take the next steps?
To keep your legacy intact, consult with your Trust professional to create a Trust. Then follow the simple steps in our guide below to open a checking, savings, or certificate of deposit (CD) in the name of your Trust with us.