You spend your life accumulating “stuff” – savings, a home, your favorite pieces of art, that timeshare in Mexico, even your cars. These things bring you joy and comfort and make up one small piece of the total you.
But what do you want to happen to those items when you’re no longer around to enjoy them?
That question is at the core of estate planning.
Estate planning is an important part of healthy finances – it allows you to make decisions about what happens to your money (and other assets) after you’re gone. In turn, that helps you to have a part in securing your loved ones’ futures.
Related: Estate Planning 101: Making Sense of Digital Assets
One critical tool in the estate planning realm is a trust. Today, we’ll be exploring how and why you might use a trust to round out your estate plan and give back to your loved ones.
What is a Trust?
Leaving assets to your loved ones can be complicated. What if your beneficiary is a minor, or would otherwise have trouble managing a sudden influx of money?
A trust is a tool you can use in those situations to help add structure to an inheritance. It gives you control over both how and when your assets are given.
Investopedia writes that “a trust is a legal entity with separate and distinct rights, similar to a person or corporation.”
Essentially, a trust introduces a third person to the scenario. Rather than just you and the beneficiary (who will receive the assets), you now have a trustee. The trustee is given the legal right to “hold title to and manage property or assets for the beneficiary.”
That doesn’t mean they’re given free reign to do whatever they want with your money. A trustee is legally obligated to act in the best interests of the beneficiaries and adhere to the instructions you set forth in trust documents.
Who Can Act as a Trustee?
Nearly anyone can act as a trustee – friends, family members, lawyers or even your financial advisor. There are no specific qualifications; it’s up to you to choose someone you trust to carry out your wishes. If you choose to appoint more than one individual, they are then known as co-trustees and would make decisions together.
Additionally, you can hire a professional trustee to manage the inheritance, although they usually incur fees for their services. The fees can be worth the hassle especially if you do not have someone that can fulfill the role.
Lastly, there are “corporate trustees,” which offer professional administration, financial management and potentially higher stability – although, once again, they often come with substantial fees.
You may also wish to appoint a “successor trustee,” who will take over trustee duties in the event that the initial trustee refuses to take on the duties or becomes otherwise unable to carry out the role.
What is a Living Trust?
A “living” trust (also known as a “revocable trust”) is different from regular (“irrevocable”) trusts in that it goes into effect while you are still alive. For example, if you wanted to give money to your adult children each year to help with living expenses, you could establish a living trust that doles out a certain amount annually.
Rather than having a trustee, you would be able to act as the “manager” – although you can still appoint someone else if you so choose. You can change the terms at any point in time, or even end the trust if you were to change your mind down the road.
The main benefit of a living trust is that it helps to avoid any hiccups upon your passing. Usually, inheritances must go through a legal process known as probate court. However, if you’ve already established a living trust before your death, your beneficiaries will likely be able to avoid assets getting tied up in probate.
Note: Probate court cases are also available as public information. If you would like to retain privacy while giving out inheritances, a living trust can be helpful.
There are also different tax laws pertaining to revocable and irrevocable trusts. If you’re interested in learning more about these tax differences, it’s best to consult with your attorney and a tax professional. Your advisor can help be the quarterback to your estate team.
What Does the Trustee Do?
The role of the trustee (the executor of the trust) is no small undertaking – there are four core components your trustee will need to carry out:
- Asset collection and protection. The trustee’s key responsibilities are collecting assets earmarked for the trust and ensuring the protection of those assets. For example, if the assets included a home, the trustee would need to ensure the home is well-maintained and insured appropriately.
- Investment oversight. They put a plan in place to address the needs and interests of current and future beneficiaries, like investing and distributing the funds.
- Taxes. They must report all income generated by trust assets and pay tax on any undistributed income as well as capital gains realized by the trust. Trustees are also required to inform beneficiaries of the amounts that they must report on their personal income tax returns as a result of trust distributions.
- Recordkeeping. Every single transaction to the trust must be thoroughly documented for legalities sake.
Acting as a trustee is no small undertaking, so it’s a good idea to discuss trusteeship with your chosen individual(s) ahead of time to ensure they’re willing and capable.
Would a Trust Make Sense for Me?
Despite what many think, trusts aren’t only for the ultra-wealthy – anyone can create a trust.
If your situation or family is complicated, a trust can help the grieving family members from fighting over the estate. It also helps your executor to know exactly how to deal with the beneficiaries and protect your assets.
If you’re leaving assets to a minor, the beneficiary can receive benefits under controlled conditions, ensuring responsible management until they reach adulthood.
Additionally, trusts offer a solution for individuals concerned about potential incapacity. By establishing a trust, you can appoint a trustee to manage your assets if you become incapacitated due to illness or injury, ensuring your financial affairs are handled according to your wishes.
How Do I Create a Trust?
Although you can create a trust through online tools, it’s best to hire an estate planning attorney to ensure all your information is correct and in order. An estate planning attorney can help navigate the entire process, from opening up a trust bank account to notarizing information, etc. Each State also has its own complications and best to find an estate planning attorney in the state you live in.
It’s important to note that an estate planning attorney isn’t a financial planner – but they often can work together to make the process go smoother!
A trust is a great tool to have in your financial planning toolbox. If you’re interested in learning more about the intricacies of trusts or to discuss whether a trust is right for your assets, the financial planners here at Clarity are available to help.
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