“Regardless of your income, estate planning is a vital part of your financial plan. Planning ahead can give you greater control, privacy, and security of your legacy.” Fidelity

A trust is an estate planning tool that anyone can use to ensure their assets are passed down as they wish, to friends, family or a charity. It is a legal entity that that allows a third party, or trustee, to hold assets until an intended recipient or beneficiary is able to receive them.

Trusts can be arranged in many ways and can greatly expands your options when it comes to managing your financial assets, whether you’re trying to shield your wealth from taxes or pass it on to your children or grandchildren.

To understand how a trust fund works, it helps to understand the following three terms:

• Grantor. This is the person who transfers assets to a trust fund. That would be you, if you’re the one looking to start a trust.
• Beneficiary. The person who is given the legal right to assets in a trust fund is a beneficiary. That might be your loved ones or a favorite charity.
• Trustee. The decisionmaker responsible for ensuring the assets in the trust fund are appropriately distributed is called the trustee.

Trusts can hold assets like real property (such as heirlooms or jewelry), real estate, stocks, bonds or even businesses.

Since trusts usually avoid probate, your beneficiaries may gain access to the trust’s financial assets more quickly than they might to assets that are transferred using a will. Additionally, if it is an irrevocable trust, it may not be considered part of the taxable estate, so fewer taxes may be due upon your death.

Assets in a trust may also be able to pass outside of probate, saving time, court fees, and potentially reducing estate taxes as well.

Other benefits of trusts include:

• Control of your wealth. You can specify the terms of a trust precisely, controlling when and to whom distributions may be made. You may also, for example, set up a revocable trust so that the trust assets remain accessible to you during your lifetime while designating to whom the remaining assets will pass thereafter, even when there are complex situations such as children from more than one marriage.
• Protection of your legacy. A properly constructed trust can help protect your estate from your heirs’ creditors or from beneficiaries who may not be adept at money management.
• Privacy and probate savings. Probate is a matter of public record; a trust may allow assets to pass outside of probate and remain private, in addition to possibly reducing the amount lost to court fees and taxes in the process.

There are several basic types of trusts

• Marital or “A” trust – Designed to provide benefits to a surviving spouse; generally included in the taxable estate of the surviving spouse
• Bypass or “B” trust – Also known as credit shelter trust, established to bypass the surviving spouse’s estate in order to make full use of any federal estate tax exemption for each spouse
• Testamentary trust – Outlined in a will and created through the will after the death, with funds subject to probate and transfer taxes; often continues to be subject to probate court supervision thereafter

Revocable vs. irrevocable

The major distinction between trust is whether they are revocable or irrevocable.

Revocable trust: Also known as a living trust, a revocable trust can help assets pass outside of probate, yet allows you to retain control of the assets during your (the grantor’s) lifetime. A living trust is a legal document that states who you want to manage and distribute your assets if you’re unable to do so, and who receives them when you pass away. Having one helps communicate your wishes so your loved ones aren’t left guessing or dealing with the courts. It is flexible and can be dissolved at any time, should your circumstances or intentions change. A revocable trust typically becomes irrevocable upon the death of the grantor.

You can name yourself trustee (or co-trustee) and retain ownership and control over the trust, its terms and assets during your lifetime, but make provisions for a successor trustee to manage them in the event of your incapacity or death.

Although a revocable trust may help avoid probate, it is usually still subject to estate taxes. It also means that during your lifetime, it is treated like any other asset you own.

Irrevocable trust. An irrevocable trust typically transfers your assets out of your (the grantor’s) estate and potentially out of the reach of estate taxes and probate, but cannot be altered by the grantor after it has been executed. Therefore, once you establish the trust, you will lose control over the assets and you cannot change any terms or decide to dissolve the trust.

An irrevocable trust is generally preferred over a revocable trust if your primary aim is to reduce the amount subject to estate taxes by effectively removing the trust assets from your estate. Also, since the assets have been transferred to the trust, you are relieved of the tax liability on the income generated by the trust assets (although distributions will typically have income tax consequences). It may also be protected in the event of a legal judgment against you.

Deciding on a trust
State laws vary significantly in the area of trusts and should be considered before making any decisions about a trust. Consult your attorney for details.

As mentioned above, by creating a trust, you can:

• Determine where your assets go and when your beneficiaries have access to them.
• Save your beneficiaries (your children, for example) from paying estate taxes and court fees.
• Protect your assets from creditors that your beneficiaries may have, or from loss through divorce settlements.
• Direct where remaining assets should go in the event of a beneficiary’s death. This can be helpful in a family that includes second marriages and step-children.
• Avoid a lengthy probate court process.

This last point is a crucial one, as trusts also allow you to pass on assets quickly and privately. In contrast, settling an estate through a traditional will may trigger the probate court process — in which a judge, not your children or other beneficiaries, has final say on who gets what. Not only that, the probate process can drag on for months or even years and may even become a public spectacle as well.

With a trust, much of that delay can be avoided, and the entire process is private, saving your beneficiaries from unwanted scrutiny or solicitation.

References:

1. https://www.fidelity.com/life-events/estate-planning/trusts
2. https://www.legalzoom.com/sem/ep/living-trust.html
3. https://www.forbes.com/advisor/investing/trust-fund