What is a Trust & Do I need one?
You’ve heard of “trust fund kids” partying on yachts, so you may think trusts are only for the super-rich. While they are particularly useful for those who have assets exceeding $5 million, they can provide benefits to those with all levels of income.
So, what is a trust?
A trust is a financial tool that allows a third party (a trustee) to hold assets on behalf of a beneficiary. You can think of the trustee almost like you would the executor for a will. Different kinds of trusts will give you control of how your assets are disbursed.
Many of the wealthy prefer trusts because they do not go through probate, and so are not public documents. They also provide a tax shelter for large estates. However, they can be handy even if paparazzi aren’t looking up your estate or you’re not leaving behind millions. Here’s what trust can do for the 99%.
Advantages Of A Trust:
Below are some of the reasons why having a trust would be advantageous to you –
Property in multiple states:
If you have property in multiple states you may want to set up a Trust. You can then transfer the property into the Trust. This will avoid having to probate property in multiple states.
Control of assets:
You can set up when to distribute assets to your children. For example, they can get assets when they graduate from college. You can also specify distributions per month or lump sum payments.
You can come up with many variations, but, remember someone has to administer this when you are gone. Keeping some flexibility for the Trustee can help ease squabbles amongst your family members.
Risk Management and Protection From Creditors for Beneficiaries:
Since the Trust owns the assets in it and not the beneficiaries, creditors cannot get to the assets in the Trust. This can give indebted beneficiaries a financial “cushion.”
Providing for Minor Children:
If you named a guardian in your Will for minor children—you did, didn’t you?—your Trustee can serve as Guardian of Property or Estate for your minor children. You may have one Trust for each child or one single Trust for all your children. You may name the same person for both Guardian of the Person and Guardian of the Property.
If you already know that your children or spouse are reckless with money, you may want to specify the terms by which they can get distributions. You can be flexible in this area, in case a large sum is required for rehab or education.
A Non-US-Citizen Spouse:
If one of the spouses is a non-US Citizen, there are several restrictions on how money can be distributed. The exclusion for a non-citizen spouse is substantially lower than the $ 5 million+ exclusion for US Citizen spouses. There is a type of Trust called the Qualified Domestic Trust or Q-DOT. These types of Trusts have special requirements from the IRS and need to be setup with care.
You may want to designate who will take care of your pet and provide a fund for the care of your pet.
Faster Access to Money for Your Heirs:
No probate=faster payout.
There are a few reasons a trust should not be your only end-of-life planning too. You will not able to designate a guardian for minor children or specify the recipients of family heirlooms and other objects. A Trust should also be drafted in consultation with a lawyer, and so it may have more startup costs involved in its creation.
In conclusion, only you can decide if a trust is the right estate planning tool for you, but you should keep in mind it isn’t only for the wealthy.