Trusts are an increasingly popular estate-planning tool that allows one party (the trustor) to transfer assets to another party (the trustee) for the benefit of a third party (the beneficiary). Trusts can be a way to transfer assets, minimize taxes, and prepare for the unexpected.
At What Net Worth Do I Need a Trust?
Trusts can be used by those who are looking to establish a secure process for protecting and transferring wealth. The trustor institutes the trust and specifies how the trustee should manage the assets for the beneficiary’s benefit. Trusts can be a solution for situations where the beneficiary may be underage or need more financial supervision.
Often, trusts can be organized for the maintenance of a beloved property or pet in the event of the trustor’s death. Similarly, charitable trusts enable trustors to set aside funds for meaningful causes, scholarship funds, or institutions. Essentially, a trust is a legal agreement that allows a trustee to hold assets on behalf of a beneficiary.
Do I Need a Trust?
One reason people use trusts is to avoid probate, which is the court-supervised process of distributing assets after someone passes away. Probate can be time-consuming, expensive, and oftentimes open to the public. By using a trust, assets can be transferred to beneficiaries without going through probate. Trusts can also protect assets from creditors, minimize taxes, and control the distribution of assets after the trustor’s death.
What Are the Benefits of Creating a Trust?
Picking the right trust is crucial. As with any significant financial life planning decision, it is essential to do your research. Below are some benefits of creating a trust:
1. Protecting and preserving your assets: Trusts can shield your assets from creditors and ensure they are managed according to your wishes.
2. Customizing how your wealth is administered: Trusts allow you to specify how assets are distributed, giving you and your family more control.
3. Minimizing federal or state taxes: Certain trusts can help reduce estate and gift taxes.
4. Keeping your family happy: Trusts can be customized to accommodate unique family dynamics, such as individuals with special needs.
5. Helping a parent or other relative manage their financial affairs: Trusts can be used to manage assets on behalf of those who may need extra help due to age, illness, or accident.
What Are the Different Types of Trusts?
While there are many different kinds of trusts, the most common types of trusts include revocable and irrevocable trusts. Each of these trusts comes with a variety of positives and negatives, and it’s important to understand both before selecting the right choice for your estate.
A revocable living trust is a flexible trust that can be amended or revoked during the trustor’s lifetime. Assets in the trust are distributed to the beneficiaries upon the trustor’s death.
On the other side are irrevocable trusts. An irrevocable trust is less flexible and cannot be amended or revoked after they are created. Assets in the trust are removed from the trustor’s estate, potentially reducing estate taxes. If your goal is to reduce estate taxes, an irrevocable trust might be the best choice for you, depending on your circumstances.
Simple Steps for Setting Up a Trust
Setting up a trust requires a lot of thought and planning. When establishing a trust, consider the following steps to help get you started:
1. Work with an estate planning attorney to create a trust structure that makes the most sense for your financial situation.
2. Decide which assets to include in the trust. Not all assets will be a good fit for a trust, especially when you take into account the beneficiary and your long-term goals.
3. Identify the beneficiaries of the trust and determine exactly how much of your assets will be a part of the transfer.
4. Determine the rules of the trust, such as how and when the assets will be distributed. Ensuring that the rules of the trust are adhered to is crucial; not only does this step make sure your wishes are respected, but it can also keep assets secure and protected.
5. Choose a trustee to manage the assets in the trust. Choosing a qualified trustee is essential — take your time and speak with trusted advisors before making your final decision.
6. Prepare for a trust meeting with the trustee to understand the trust provisions. Ensure that everyone — the trustor, the trustee, and the beneficiary — are on the same page when it comes to distributing and accessing the trust.
While establishing a trust might seem overwhelming, with the right wealth management team at your side, the process can be straightforward and painless. If you need help determining whether a trust is the right decision for you, reach out to Pekin Hardy Strauss for a consultation.
This article is prepared by Pekin Hardy Strauss, Inc. (“Pekin Hardy,” dba Pekin Hardy Strauss Wealth Management) for informational purposes only and is not intended as an offer or solicitation for business. The information and data in this article does not constitute legal, tax, accounting, investment or other professional advice. The views expressed are those of the author(s) as of the date of publication and are subject to change. Pekin Hardy cannot assure that the strategies discussed herein will outperform any other strategy in the future; there are no assurances that any predicted results will actually occur.