I think I speak for many of my estate planning clients when I say the word “trust” makes them at least a little uneasy the first time they hear it. So what’s the verdict? Are trusts scary or empowering? And, what are trusts anyway? How do they work?
Trusts are empowering and almost everyone needs one for one reason or another. Trusts can help you:
- Avoid estate taxes
- Protect assets from the cost of long-term care or other creditors
- Remove money from your gross taxable estate
- Secure the financial future of your special needs child
- Facilitate your charitable giving… the list goes on.
So, what is a trust? A trust is private agreement between two parties: a Grantor and a Trustee. The Grantor is the person contributing money or other assets to the trust and the Trustee is the person who has legal ownership (this is different from being a beneficiary) of the property after the transfer is complete. The Trustee holds the money or other assets for the benefit of a beneficiary (or beneficiaries as the case may be). The Trustee has a fiduciary duty to the beneficiary and must act in the best interest of the beneficiary at all times. How is money distributed from the trust? Easy. If the trust holds real property, the Trustee can distribute the real property to the beneficiary with a simple deed. If the trust holds money, the Trustee can write a check to the beneficiary (trusts funded with cash assets should have a checkbook).
Trusts can not only help you with one or more of the goals mentioned above during your lifetime but, that same trust can also help protect your beneficiaries. Trusts are important tools in estate planning that many clients, unfortunately, do not take advantage of. While sometimes the circumstances are such that leaving assets to your beneficiaries outright is appropriate, leaving assets in trust for your beneficiaries after your death is something to consider. Why? If you leave an asset to a beneficiary outright, it becomes theirs and it is theirs to lose to creditors or otherwise. Conversely, if you continue to hold assets in trust for that same beneficiary after your death, that money is protected from your beneficiary’s creditors. This includes divorce, lawsuit and long-term care costs. Additionally, assets left in trust for a beneficiary, to the extent that the beneficiary leaves the assets in the trust, do not become part your beneficiary’s gross taxable estate.
Trusts should not cause you anxiety. Rather, as you can see, trusts are much simpler than you may have thought and once you understand what they are and all that they can do to protect your assets, you can put them to work for you and your beneficiaries.