Thinking about what happens to your family when you pass away may be upsetting. But it can be a good way to reduce the stress your loved ones will deal with during the grieving process. Read: A traditional life insurance policy or will isn’t the only way to help. A trust fund (aka trust or trust account) can come with major benefits, too. Here’s what you should know about creating a family trust.
Back up. What is a trust, exactly?
It’s an agreement created when a person (aka the trustor/grantor) gives a third party (aka the trustee) the authority to hold assets (like money, property, or a business) for beneficiaries. And helps execute the trustor’s instructions around distributing those assets.
Some examples of when a trust could be used: If trustors don’t want beneficiaries to have access to funds until they reach a certain age. Or if funds should be used on the beneficiary’s health care needs. You can choose a certain trust fund depending on your situation or goals.
So there are different types of trusts?
A trust account isn’t one-size-fits-all, and there are tons to choose from. Example: If you want the bulk of your assets to go to your grandchildren, you could use a generation-skipping trust. And if you think your home value will skyrocket after you pass away, it might be time to consider a qualified personal residence trust (aka QPRT) to help reduce taxes. But all trusts typically fall within a few categories…
Testamentary trust vs living trust
A testamentary trust is also called a “trust under will.” This trust fund is created based on the will after a grantor (the person who funds the trust) dies. A testamentary trust fund can be used to gift charities or provide lifetime income for loved ones.
FYI: In general, wills are subject to probate. Which essentially means that a court has to validate the legal document before beneficiaries can get their hands on assets. Typically, trusts don't have to go through probate. But because testamentary trusts are tied to wills, they are subject to the probate process. Meaning, your beneficiaries may have to go through a long process (sometimes over a year) before getting their inheritance.
Then there are living trusts. This type of trust fund is created when you’re alive. And you can change the terms as many times as you’d like. Having second thoughts about releasing your savings to your beneficiaries when they turn 18? You can change the age limit, no questions asked. But once you pass away, the terms are permanent.
A living trust is a great way to make sure your beneficiaries can access your assets immediately. Because there’s no need for probate court.
Irrevocable vs revocable trusts
If a trust fund is revocable, the terms of the trust can be changed up until the grantor is deceased. Which may sound appealing because of the flexibility, but there are a few drawbacks. Like the fact that assets in a revocable trust are up for grabs if you lose a lawsuit against a debt collector. Or if you owe state and federal taxes.
The terms of an irrevocable trust are set in stone (which is why they’re called irrevocable trusts). The good news: the grantor’s assets aren’t subject to any taxes after death. And if the grantor is ever sued, assets in an irrevocable trust can’t be touched if the grantor loses the case.
What are the benefits of creating a trust fund?
It depends on the type of trust fund you have. But generally, here’s what you can expect:
Control of your finances
Creating a trust is a great way to make sure your assets are split and used how you’d like. A will does this, too…but they have to run through courts to be validated. A trust fund doesn’t always need to go through those steps. Which means your beneficiaries have easier access to their inheritance, and the whole process remains private.
A trust fund can also come with a few tax benefits. Because if you create an irrevocable trust, your assets will be protected from estate taxes after your death. Which means more money for your beneficiaries. That’s because an irrevocable trust eliminates the need for your beneficiary to pay taxes on your assets…no matter how much they appreciated.
Are there any cons about creating a trust fund?
A major downside of opening a trust is the time and money it takes. Which is why trust funds are typically associated with the wealthy. Think: around $1,000 to $2,500, on average if an attorney completes the process for you. And you’d have to create new deeds and documents for every. Single. Asset. Because you’ll have to transfer ownership to your trust. That means new titles (aka certificates that prove ownership) for your bank accounts, stocks, properties, and anything else you want covered in the trust.
Got it. How do I open a trust?
Start by reviewing your assets to choose what you want to include in the trust. And think about who you want as your trustee and beneficiaries. Then think about any rules you want to implement around them. Do you want your beneficiaries to reach a specific age before they can access everything? Do you want a portion of your assets to go to charity? Once you’ve answered these questions, you’re ready for the next step.
It’s a great idea to go pro with an estate attorney. Because a trust is legally binding, and the process can be complicated. Managing a trust means keeping up with tax compliance and lots of record keeping. And an estate attorney can set you up with everything you need to make the process easier. So while you can do it on your own, most people don’t. For good reason.
One more time for the people in the back: A trust fund isn’t just for wealthy families. No matter your income, it’s a great way for you to set your family up for financial success. A good rule of thumb: tap a pro to help you navigate it all.
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