Smart money management is all about planning for the future. Whether you’re establishing an emergency fund or preparing for retirement, just about any financial decision you make today is all about building a more secure tomorrow.
One way to financially prepare for the future is to establish a trust. A trust is a legal document that protects and controls assets — anything from money to a home — set aside for a specific use or person. Trusts are often used in estate planning, as they allow you to dictate what happens to your assets after you’re gone and let you plan for potential estate tax liability. Some people establish trusts for their children, spouses, or their favorite charities, but you can also establish a trust for your own future financial needs, such as health care costs.
“A trust can be an effective tool for many people in many different financial circumstances,” says Noah Harden, a lawyer who specializes in trusts and estate planning.
Once you’ve established a trust, your trustee will need somewhere to put the money. At Ally Bank, your trustee can open an Interest Checking Account, Online Savings Account, Money Market Account or any of our CDs as an account for that trust, allowing the funds to earn a competitive interest rate.
While you’ll want to explore the benefits of a trust with your financial professional, here are a few you should keep in mind.
Trusts Have Administrative Perks Over Wills
One of the biggest perks of a trust, says Harden, is that it allows you to circumvent probate. CNN Money defines probate as the legal process that happens when someone dies. A probate court examines the will to ensure its authenticity and then distributes the assets accordingly. CNN Money notes that probate is an expensive process that can take quite a bit of time — sometimes up to a few years.
But when you set up a trust, you may get to skip the sometimes-arduous process of probate. Skipping probate carries another benefit that wills don’t: privacy.
“Everything that gets filed with the probate court is generally part of the public record,” Harden says. “If you start a trust as part of your estate planning, it keeps all of your personal wishes private. There’s nothing for someone to go to the courthouse and look up in a file.”
You Make the Rules — Even After You’re Gone
Are you looking to leave money behind for your grandchild’s future college education? Or maybe you have a disabled adult child who needs financial support after you pass away. If so, a trust may be the perfect vehicle for you, as the specific wishes set forth in the trust agreement must be followed by the trustee even after you’re gone.
For instance, Harden notes that minors are unable to accept property outright, so establishing a trust in their name allows you to ensure that they’ll receive this money to use for whatever cause you specify (like college tuition).
“If you want to support someone who has a disability or is incapacitated,” says Harden, “a trust document can have rules set up so the trustee [the person who manages the money per the trust document] can step in and use the funds for that person’s support, based on the wishes of the grantor of the trust.”
Harden also points out that married couples often use trusts in estate planning in case a surviving spouse remarries. Your trust can ensure that your assets go to only your chosen beneficiaries.
“Similarly, if it’s your second or third marriage and you both come to the marriage with children from previous marriages, you can set up a trust so that, upon your death, your assets would benefit your own children, instead of your spouse’s children,” Harden explains.
Reducing Estate Tax
Harden notes that another benefit of establishing a trust is that it allows you to reduce or avoid the estate tax. “This is something that’s specific to people who have estate tax concerns, which is basically people with assets over $5.25 million, the estate tax exemption amount,” he says.
Anything above $5.25 million in assets is subject to an estate tax, which Harden notes is at a rate of 40 percent for 2013.
“There are all sorts of different trusts than can help [reduce the taxable value of your estate] for legal purposes under the $5.25 million,” Harden says. “The options and ways in which you can set up that trust are virtually endless.”
Given the many ways in which a trust can be used to avoid or reduce an estate tax, Harden suggests working closely with a tax attorney to make sure you’re taking the correct steps.
Have you established a trust as part of your estate planning? What were your reasons for doing so?