You don’t have to be wealthy to benefit from a trust. Here are some questions to help you decide if there are advantages for you.
A trust is a legal agreement that allows one party (the grantor) to give another party (the trustee) the right to hold assets for the benefit of a third party (the beneficiary). Various types of assets can be held in trust, including (but not limited to) real estate, securities, life insurance, business interests and cash. Details of the agreement are formalized in a trust document, created by an attorney, which guides the trustee in managing the assets based on the grantor’s wishes.
Trusts can take various forms, depending on the needs and objectives of the grantor. Trusts can help achieve many goals, including the following: mitigate or eliminate estate tax issues; avoid the cost and publicity of probate; protect assets from creditors; manage assets for minors and other beneficiaries; preserve assets for those with special needs; and provide greater control over the assets after the grantor dies or becomes incapacitated.
Questions to Ask
Though they have long been used as estate planning tools for high-net-worth individuals, trusts can also be helpful for families of all sizes and incomes. Review the following questions and consult with a financial representative to decide if a trust might be helpful for your situation.
- 1. Do you have young children?-If something were to happen to both parents of younger children, it would be important to protect, manage and grow the family’s estate assets until those children can responsibly manage their investments and finances themselves. A trust and a designated trustee can provide that financial framework until the children reach maturity.
- 2. Are you caring for someone with special needs?-If you have a family member with a physical or mental disability, it’s likely you’ll want to provide for that person in the event of your death. A carefully drafted special needs trust may allow you to supplement the assistance provided by federal and state programs such as Social Security Disability without putting those entitlements at risk.
- 3. Would business interests be part of your estate?-When entrepreneurs have significant net worth invested in a business, they may lack liquidity to pay estate taxes, which would force the sale of the business when they die. An irrevocable life insurance trust can hold a life insurance policy with a death benefit to provide liquidity for estate taxes, allowing the business to continue operating under the control of a future generation.
- 4. Do you have complex family dynamics?-Trusts can offer more control than a will for disbursing assets in the case of divorced individuals, blended families, strained parent/child relationships or other special circumstances. You can specify the timing and conditions to meet particular needs, such as to ensure that children from previous marriages receive assets or to protect beneficiaries from creditors, mismanagement, or overspending.
- 5. Do you anticipate estate tax issues?-People with estates larger than the federal estate tax exemption ($5.25 million for an individual or $10.5 million for married couples) may use a properly structured trust to postpone, reduce or eliminate estate taxes. A financial representative can help you determine your needs and connect you with the appropriate resources to address them.
- 6. Are you comfortable having your estate details on the public record?-At a person’s death, assets that are not in a trust, jointly held or subject to beneficiary designations go through probate. Probate is the legal process of settling an estate, and can be expensive and time-consuming. Furthermore, probate proceedings are a matter of public record. A trust keeps your financial information private and permits you to transfer your estate as you intend.->
- 7. Would you want to provide specific support for your spouse, children and grandchildren?-As grantor for a trust, you can control not only how your assets are distributed after your death, but also provide for successor beneficiaries. For example, the trust could supply your spouse with a lifetime income stream and/or distributions of principal upon your death. It could also have provisions for after your spouse’s death to pass remaining assets to children, grandchildren or others you designate.
- 8. Do you want to leave a legacy to charitable causes?-Charitable trusts allow you to make donations to charitable causes and receive estate and income tax benefits. There are many options – work with an estate planning advisor to construct the trust based on your unique circumstances and intentions.
Using a trust offers you many different options to control and direct how assets are managed and distributed, both during your lifetime and after your death. A financial representative can put you in touch with a range of resources to help you decide the approach that is best for you, including providing guidance on estate planning and choosing a trustee.