Understanding Trusts
A trust generally involves at least three people: the grantor/maker (the person who makes or creates the trust), the trustee (who holds and manages the property for the beneficiaries), and one or more beneficiaries (who are entitled to the benefits of the trust property). The trust document instructs the trustee how to hold and manage the trust property for the beneficiary(ies). The trust can direct the trustee to continue to manage the assets for the beneficiary(ies) until a stated event (i.e., the beneficiary reaches a certain age), distribute the assets to the beneficiary(ies) immediately upon the grantor’s death, or some combination of the two.
It is common for the maker of a trust to wear all three hats (grantor, trustee, and beneficiary) during his or her lifetime, and then designate a successor trustee and trust beneficiaries upon his or her death.
Why Would I Want to Create a Trust?
Young Child or Beneficiary - If a young adult is a direct beneficiary of a life insurance policy, retirement account, bank account or other asset, the proceeds are entirely his or her property to spend or dispose of in any way he or she wants at age 18. If you would like to limit control of the assets for young beneficiaries until they are mature enough to handle their inheritance, you can direct the young beneficiary’s share to be held in trust. You can select a person you trust, who has similar values as you, to be the trustee. Until the beneficiary reaches the designated age, the money can be used for the beneficiary’s care, maintenance, support and education as the trustee determines. When the beneficiary reaches the designated age(s), the trust assets can be distributed to the beneficiary.
Wayward Child or Beneficiary - A trust can be useful if you have a child or other beneficiary who has difficulty managing money, has an unstable job history, been in many relationships, and/or has drug or alcohol problems. If the child receives the inheritance outright, it is a windfall that could quickly become depleted. Instead, if the inheritance is provided in trust, the assets can be a long-term financial resource that will be protected from creditors and divorce.
Special Needs Child or Beneficiary - A trust can provide a good plan for a child or beneficiary who needs government benefits, such as Medicaid or Supplemental Security Income (SSI), because he or she will never be able to achieve financial independence. Leaving an inheritance in a special needs trust can improve the beneficiary’s life without impairing his or her access to means-tested benefits.
Successful Child or Beneficiary - If you have a successful child or beneficiary who is in a career that subjects him or her to lawsuits, it can be wise to leave his or her inheritance in trust for that person. If the assets are held in trust, they are protected from any future claims that might be made against the child or beneficiary.
Blended Family or Second Marriages - Blended families are increasingly common, and it can be challenging to balance the financial needs of the surviving (new) spouse and the children of a previous relationship. There are different types of trusts that can be set up to provide for the new spouse and protect the children’s inheritance.
Real Property in Multiple States - If you own homes or real property in more than one state, a living trust may be especially useful for avoiding separate probate proceedings in each state where the property is located.
Financial Privacy - If it is important to you to keep your finances private even upon your death, then you should have a living trust. A living trust does not have to be filed with the probate court, and therefore, the terms of the trust are not made a public record that the whole world can view. Only the beneficiaries are entitled to know the trust’s terms and assets.
Privacy From Family Members - If you do not want your heirs-at-law to find out to whom you are leaving your money or are not sure the names and whereabouts of your heirs-at-law, a living trust is a valuable tool. If a last will and testament is used to transfer assets upon death, the decedent’s heirs-at-law are notified of the filing of the will and they have an opportunity to contest it. However, with a living trust, the trust is kept private and only the beneficiaries are notified of the trust’s terms.
Minimizing Federal Estate Taxes - For an individual who may be subject to federal estate tax (currently an individual with more than $11.4 million in assets or a married couple with combined assets over $22.8 million), a trust can be used to minimize the federal estate taxes.
