The Power of a Trust

When you think of a trust fund, the first thing that comes to mind for many people is mansions, yachts, and weekend trips to Bali on private jets. However, trusts are versatile vehicles for high net worth individuals and middle-class families alike who are interested in careful estate planning. If you want to ensure that the wealth you’ve worked so hard to build is protected for future generations, there are a variety of trusts that will accomplish your wishes.

Creating a Trust

To understand how a trust works, you’ll need to know some key terms:

Trustor: the individual that gives assets to others.
Trustee: the person or firm that holds onto the assets and distributes them according to the stipulations of the trust.
Beneficiary: the person or people who are the intended recipients of the assets.

A trust is a legal document created by a trustor who gives the trustee the right to hold property or assets in a fund for the beneficiary. This lets a person determine how and when their money or property will be distributed before or after their death. Trusts are also a viable option for people who want to provide for beneficiaries that are underage or those who have a mental disability that might impair their ability to manage their finances.

For example, let’s say you own an apartment complex that operates with a group of valued employees. You want your business venture to remain successful and continue to be operated with the same staff, but you also want the profits to go to your son who has a disability and is unable to reasonably manage the business. A trust is the perfect solution to provide for your son and maintain the structure of your business in your absence.

Most trustors rely on a professional trustee, such as a trust attorney or an investment bank or firm, to handle their assets as opposed to entrusting assets to a family member. The reality of the situation is that relatives could face lawsuits, divorces, or other financially compromising situations of their own that could ultimately put your assets at risk. Even when family members and friends have the best intentions in mind, the division of someone’s assets can create unnecessary friction when emotions are already strained which is why many people leave these responsibilities to a professional.

Benefits of Establishing a Trust 

When it comes to estate planning and ensuring the continuation of your wealth for future generations, trusts offer a number of undeniable benefits. 

  • Control Distribution of Your Assets: The primary benefit of a trust is that you are able to ensure the financial well being of your loved ones in the future in a way that accommodates your unique situation. While financial planning might be top of mind for you, that is not the case for every beneficiary. A trust allows you to control your wealth even in complex situations (such as children from more than one marriage) and ensure assets end up in the right hands.
  • Establish Your Legacy: Whether you’re interested in creating a safe financial future for your grandchildren or funding a charity that is close to your heart, trusts are a great way to establish your legacy. With a trust, you can support your family for generations and safeguard against the uncertainty of the future. This can be sentimental, like leaving your family’s cabin to your children or pragmatic, like funding your grandchildren’s college tuition so they can enter the adult world debt-free.
  • Avoid Probate and Protect Your Privacy: Should your will go to probate, the information contained in the will becomes public record. A trust is able to avoid probate, offering more privacy for your beneficiaries. Additionally, the court proceedings that occur due to the probate process can take months or even years, while the distribution of wealth can take just a matter of weeks with a trust.
  • Saves Money: In addition to reducing the cost of court fees, your beneficiaries might be able to experience minimized or no estate taxes based on the type of trust you establish. Assets that are moved into the trust are effectively removed from your estate, meaning that the size of your estate is reduced in the eyes of the IRS.
  • Safeguard Against Changing Rates: Estate taxes are determined based on the size of your estate and the bar for estate tax exemption has historically shown huge changes from year to year. In fact, in 2017, estate taxes were only owed if the estate exceeded $5.49 million, but in 2018, that number jumped to $11.18 million. As of 2019, an estate exceeding $11.4 million are required to file a federal estate tax return. That threshold could drop back down to the 2017 rate in the coming years, meaning you would lose the opportunity to save taxes on nearly $6 million. Creating a trust that reduces the size of your estate is a surefire way to limit your beneficiaries’ susceptibility to estate taxes in the future.

Types of Trusts

Once established, a trust is able to provide legal protection for the trustor’s assets and can offer a number of other benefits. But first, you’ll need to know which type of trust is most beneficial to ensuring the distribution of your wealth. This will depend on factors like the diversity of your investment portfolio and asset classes, when you want these assets to be dispersed, and over what time frame. 

Living or Testamentary

A living trust (also referred to as an inter-vivos trust) is fairly self-explanatory and allows you to place assets into a trust while you are alive. The assets are then transferred to the beneficiary at the time of the trustor’s death. People choose living trusts for a variety of reasons:

  • If you want someone else to manage some or all of your property.
  • If you own a business and want to ensure its continued operation in the event of your death or disability.
  • If you want to protect your assets from the financial incompetence of yourself or your beneficiaries. 

On the other hand, a testamentary trust (also called a will trust) only specifies how an individual’s assets will be designated after their death and are inalterable. 

Revocable or Irrevocable 

A revocable trust allows the trustor to retain control of their assets during their lifetime and the trust can be altered or even dissolved as the trustor sees fit (as long as they’re alive). People choose to use revocable trusts as a means of estate planning with alternative investments to avoid the costs and delays that can come with probate in some states.

An irrevocable trust cannot be modified, amended, or terminated after it has been created without the permission of the beneficiary. This is the more popular option because it can protect beneficiaries from probate costs as well as estate taxes by removing the assets from your estate entirely. Because the assets have been transferred to the trust, you get to enjoy the break from tax liabilities on income generated by the asset.

While living trusts can be either revocable or irrevocable, depending on the terms established in the trust, a testamentary trust is exclusively irrevocable because it only takes place following the death of the trustor. The fact that the assets have already been moved out of the trustor’s possession is what leads to minimized or no estate taxes.

Funded or Unfunded 

The last distinction to consider is whether the trust will be funded or unfunded. In the case of a funded trust, the individual has put assets into the trust during their lifetime. However, an unfunded trust is only the trust agreement without any assets in the trust at the time of its creation. Some people create these as a way to protect themselves and their loved ones if they encounter mental illnesses that would impair their ability to manage their wealth, such as Alzheimer’s. In this situation, a person is generally able to manage their affairs while they’re alive, but once the disease progresses to a certain point, they might have a fiduciary move assets into their trust. The complication with an unfunded trust is that it exposes an individual’s assets to lawsuits and credit collectors the trust is designed to avoid, which is why proper funding is essential.

Trusts allow you to realize a vision for your estate and determine the future direction of your wealth for your beneficiaries. Join us at the Mile Marker Club's upcoming Symposium to gain valuable insight from our industry experts on how to establish a trust that will be properly drafted, funded, and carried out. 

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