Many movie plots made it seem like trust funds were for the rich and famous. That is no longer the case as there are many reasons to set up a trust as part of our estate or financial plans. A trust fund provides for beneficiaries while maintaining control of how assets are distributed. Some parents may opt to set up a trust fund for a child, rather than leaving them money through a will because they’re concerned the child would mismanage a large, lump-sum inheritance. Trust funds can also be used to avoid probate and minimize taxes.
Our home is usually the main asset we pass on in our Will, and with current housing prices, that is likely a substantial amount of money! If your Will includes young beneficiaries, disabled, or will need assistance managing a large sum of money, putting a trust in place (called a Testamentary Trust) to direct how the funds can be dealt with is an important provision to include in your Will.
In addition to trusts established in your Will, you can set up trusts to manage assets while you are alive and distribute the remaining property to beneficiaries once you pass on. These trusts are called Revocable Trusts, which means you can terminate or amend the trust if circumstances or your needs change, as long as you can do so. If done correctly, these trusts avoid the necessity of Probate but can trigger certain tax implications and do not shelter the assets from any creditor or legal claims, so accounting advice is a must to be sure the trust is advantageous for you and your beneficiaries.
Another type of trust that can be created in your lifetime is Irrevocable Trust. As the name suggests, you do not retain control of the assets in this trust and the trust cannot be modified once created, except in very particular circumstances. The purpose of these trusts is for specific purposes such as minimizing taxes, protecting a beneficiary’s qualification for government benefits, or sheltering assets from creditors or legal claims. Due to the specific nature of this trust, very careful planning and consideration are required.
Trusts, both testamentary and revocable/irrevocable, can also be established for specific purposes such as pet trusts, charitable remainder trusts, and special needs trusts. The cost of setting up a trust depends on the type of trust you’re setting up. If you’re establishing a relatively straightforward revocable trust as part of an estate or financial plan, the cost will be a small fraction of what can be saved in mismanagement, probate fees, or taxes.
Holding funds in a trust for specific purposes has become the norm rather than the exception, but it needs to be done in very specific ways for banking, probate, and income tax purposes. Working with your lawyer and your accountant is the key to success and achieving the result you intended by creating trust in the first place.