Trusts can be important tools for wealth management but are commonly misunderstood. To determine whether trusts should be a part of your financial portfolio, it’s important to understand what they are and how they work. In this article we will make sure you understand the function and purpose of trusts so that you can decide if a trust should be a part of your wealth management plan.
Key terms to understand
Trusts are legal documents that arrange for the management and distribution of monetary assets and property. Throughout a trust document you will encounter some specific language. Here are some key terms to understand about trusts:
- Trustor, grantor, settlor – The person who creates the trust, sets the initial conditions, and contributes the assets.
- Trustee – The person or organization that controls and manages the trust through its lifetime. The trustee is responsible for ensuring the terms of the trust are upheld and for distributing payments to the beneficiaries.
- Beneficiary – The individual or group who receives income/payments/assets from the trust.
How does a trust work?
First, once you decide you want to set up a trust, you will meet with an estate planning attorney to discuss the terms of the agreement. Then, you will draft the legal document, which sets the legal terms of your trust. When the document has been drafted and signed, it will be time to fund the trust by retitling your assets into the trust’s name.
More control than a will
If you’re considering your estate plan, trusts can give you more peace of mind about dividing and allocating property and assets than a traditional will. With a trust, you will be able to determine not just who will inherit the property, but also who can use it, how it can be used, whether it can be sold, and what will happen with the proceeds. This can be incredibly useful for many estate plans.
When do you want a trust?
Trusts can be beneficial for tax reasons, but that is a tricky scenario. Be careful about creating trusts as tax shelters because the costs of creating and maintaining the trust may not outweigh the benefit. Also, don’t forget that trusts are subject to taxes themselves, often at higher tax brackets than individuals. Instead of tax sheltering, think about these scenarios for when you might want to consider a trust.
- Wealthy estate – High wealth estates can benefit from trusts to eliminate estate tax issues and preserve wealth for future generations. With a trust you can impose certain conditions that will ensure the wealth is used responsibly, preserve a public family image, or fund charitable contributions.
- Potential estate contest – Trusts are harder to contest than wills. If you have reason to believe your estate distribution may be contested after your death, it may be prudent to set up a trust to handle the estate.
- Divorce preparation – Trusts can be used to remove assets from potential divorce proceedings. Some couples use this scenario instead of the more common prenuptial agreement. Certain trust scenarios may still be considered joint property, so be sure to discuss this carefully with your attorney before determining this course of action.
- Disabled family members – If you’re responsible for the welfare of your disabled family members, a trust can be a secure way to prepare for their care after you are gone.
There are many potential uses for trusts, from preparing your estate to funding charitable organizations. Just be sure to consultant with a trust professional so you can be sure you’re making the right decisions about your estate.
