What is a Trust? A trust is a collection of assets (something of value). Many kinds of trusts are available, and it’s possible to customize them to meet your individual needs.
Trusts aren’t just for ultra-wealthy and famous.
A trust can help manage and protect hard-earned assets for:
- A homeowner
- A business
- An investor
Podcast: Schmuck Tax
It’s possible to place almost anything of value in the trust, including:
- Mutual funds
- Equity shares
- Real estate
Trusts are useful and practical financial tools that almost anyone can use.
- Save money
- Avoid high taxes and legal fees
- Prevent probate (the court process for a will)
- Provide funds for educational purposes for family members
For instance, your grandfather saved for your college education by setting aside money in a trust. When you start going to college, your trust kicks in and you can use it to pay for expenses like tuition and books.
Trusts include three parties:
- Grantor – The person who sets up and puts assets into the trust. The grantor sets the terms about how the assets in the trust will be managed. You are the grantor if you are arranging a trust for someone else.
- Beneficiary – The grantor creates the trust for the beneficiary, the person who benefits from the trust. The trust’s assets don’t technically belong to the beneficiary, but they’re managed for his or her benefit according to the rules the grantor put in place. You are the beneficiary when someone else arranges a trust for you.
- Trustee – The grantor identifies a person or managing institution, like a bank or trust company, or even several advisors to oversee the trust. Appointing several advisors can help protect the beneficiary’s interests. The trustee’s duties are outlined in the trust document and by the law.
Calculator: How much will you have at retirement?
The grantor may choose to pay the trustee(s) a “management fee.” In some situations, the trustee is made responsible for managing the assets in the trust but in other situations the trustee can assign other investment professionals to manage the assets in the trust.
Types of Trusts
- Revocable trusts
- Irrevocable trusts
- Credit shelter trusts
- Generation-skipping trusts
- Qualified personal residence trusts
- Irrevocable life insurance trusts
- Qualified terminable interest property trusts
How Are Trust Structured?
Trusts are legal structures, and there are many different ways to set them up. Some states offer advantages to grantors and, depending on what the grantor wants to accomplish, setting up a trust in one of those states can make good financial sense. Discuss these options with an experienced trusts and estates attorney:
- Perpetual trust – A type of trust that can continue on an indefinite basis or ‘forever.’ Some states forbid grantors from creating these types of trusts because they don’t want to encourage future generations of trust fund babies. For instance, the states of New York and Massachusetts don’t allow you to establish wealth in perpetuity for your heirs. Nearby New Jersey and New Hampshire are fine with the idea.
- ‘Spendthrift’ Clause – Grantors add this provision to a trust when they don’t want the beneficiary to use trust assets in an irresponsible manner. For instance, the beneficiary can’t use his or her trust funds to pay gambling debts if the trust has a spendthrift clause (a clause that prevents the beneficiary from using trust fund money wastefully). Sadly, casino creditors probably can’t touch the assets if the beneficiary loses money in Vegas.
Why You Need a Trust
Trusts offer valuable protection from creditors, but consider these additional reasons to use them.
- You don’t know what the future will bring. How do you know if your children will follow your wishes after you’re gone? By electing one or more third-party trustee(s), you don’t need to worry. For instance, if you leave a 500-acre ranch to your daughter and don’t want her to sell the land when developers call, you can put a rule in the trust to keep her from selling.
- You can support a charity. Arranging a Charitable Annuity or Charitable Remainder Trust can save your estate a lot of money if you fund a special charity. In addition, your trust can allow you to avoid certain estate taxes to provide more cash for your heirs.
- Provide for a child or grandchild’s education. An educational trust is one way to save for college. An educational trust pays for expenses like tuition and books, and hands over whatever money is left after graduation.
- Build a legacy. Let’s say you built a start-up and it’s a wild success. Using a trust allows you to give profits from the business to your children even if they don’t want to take over when you retire. You protect the business by electing one or more trustees to ensure that the business lives on.
- Get creative with Estate Planning. Trusts allow you to do interesting and wonderful things with your money. For instance, you purchase a life insurance policy and place it in a trust to provide for your spouse and children in case you die. At your death, the proceeds from the policy distribute to the trust and your family can then use the money to support themselves, tax-free.
Trusts are valuable financial tools that almost everyone can use. There are many different kinds of trusts so, depending on your financial goals, it’s best to discuss trust options with an attorney.
- A “beach bum” provision says that the beneficiary only receives trust fund benefits if they work for a living. The provision is supposed to motivate the beneficiary to engage in productive activities instead of living from trust fund proceeds.
- Some trusts have provisions that require the beneficiary to take drug or alcohol tests before receiving benefits: they don’t get any money if they don’t pass the test.
- “Trust fund babies,” or people with big trust funds thanks to their parents, have been around since the early 20th century, but most modern-day millionaires did not inherit their money.
- Famous investor Warren Buffet had some words to say about how much money parents should leave their children: “give them enough to do anything, but not enough to do nothing.”
- Shenkman, Martin M. The Complete Book of Trusts. 3rd ed. New York: Wiley, 2002. Print.
- McCoy, Jerry J., and Kathryn W. Miree. Family Foundation Handbook. Chicago: CCH, 2009. Print.
- Couric, Katie. The Best Advice I Ever Got: Lessons from Extraordinary Lives. New York: Random House, 2011. Print.
- Orman, Suze. Ask Suze –about Wills and Trusts. New York: Riverhead, 2000. Print.
- “Will & Trust Kit : Ultimate Protection Porfolio : Protection Help.” Will & Trust Kit : Ultimate Protection Porfolio : Protection Help. Suzeorman.com, 1 Jan. 2015. Web. 01 Dec. 2015.
- Munro, Margaret A., and Kathryn A. Murphy. Estate & Trust Administration for Dummies. New York: Wiley Publishing, 2013. Print.
- Friedberg, Barbara. Personal Finance: An Encyclopedia of Modern Money Management. Santa Barbara, CA: Greenwood Publishing, 2015. Print.
- 2010 CEB Trust and Estate Litigation Seminar a Comprehensive Analysis from Intake to Resolution: Reference Materials, December 2010. Oakland, CA: Continuing Education of the Bar–California, 2010. Print.
- Kennon, Joshua. “Charitable Remainder Trusts for Beginners.” Http://www.joshuakennon.com. Joshua Kennon, 30 Oct. 2012. Web. 1 Dec. 2015.