What is a trust and who should use one?
When someone hears the word "trust," there are usually certain images that come to mind. Things like "wealthy trust fund babies" and elderly individuals with high net worth, to name a few. The truth, however, is more people benefit from having a trust than you probably think.
If you're looking for the best, most comprehensive way to protect your family after you're gone (and you're a homeowner with at least $160,000 of assets) a trust will likely be an ideal estate plan option for you.
What is a trust?
A trust is a legal fiduciary arrangement that allows you to set up your assets to be held and managed by a third party. This party is known as a trustee, and the person or firm you appoint to this role will be responsible for ensuring that your estate is handled in the manner you’ve outlined.
Despite what many people think, Trusts can be beneficial for all sizes of estates, not just very large ones. There is a common misconception that an estate planning trust is only suitable for the extremely wealthy. But the reality is there are many benefits to a trust, including:
- Avoiding probate court so beneficiaries can receive assets sooner
- Privacy
- Protection
- Reduced or eliminated estate and gift taxes
- The ability to better control future wealth by establishing conditions for asset distribution
What is the purpose of a trust?
There are several purposes of an estate planning trust, but one of the more common reasons people choose to use them is to better ensure their assets are handled exactly as they wish, from the moment the trust goes into effect, until long after passing. They can also be used as a means to manage tax consequences on an estate. Trusts are often used in cases where someone wants or needs to set up financial care for young children, long-term planning and care for dependents with disabilities, or benefit their favorite charities.
Who should have a trust?
Trusts aren’t necessarily the best solution for everyone. There are several reasons a trust might make sense, but that doesn’t mean absolutely everybody needs one. A trust may be beneficial for those in specific situations, such as:
- You own a home or other property, particularly if it’s out of state
- You have $200k+ in assets
- You wish to keep your assets and financial details private
- You are hoping to simplify the probate process for your loved ones after you pass
- You have a taxable estate – keep in mind the qualifying value that deems an estate “taxable” will differ from state to state
- You want to set up stipulations on inheritances – for example, awarding a dollar amount for certain life events such as graduating college, getting married, etc.
Types of trusts
As noted, there are several types of Trusts, each with its own nuance and purpose. Before establishing a Trust, be sure to have a clear idea of your goals so you can use the type of Trust best suited to accomplish them.
Living trust
A living trust is created during your lifetime, and it designates a trustee who will manage assets for your beneficiary or beneficiaries after your passing.
Revocable living trusts
A tevocable living trust is created during your lifetime and can be altered or revoked while you’re alive. It is used to avoid probate, but while you’re alive, it's not an ironclad technique for asset protection. Any assets in your revocable living trust will still be available to creditors during your lifetime, although it will be more difficult for them to gain access.
Irrevocable trusts
An irrevocable trust means you cannot change or alter anything in the trust once it’s established. You have legally removed any rights to ownership to anything you put in the trust. In some cases, an Irrevocable trust may be used as a way to protect assets from creditors or bypass estate tax, as you will have effectively removed yourself as owner for any of the assets inside the trust. Irrevocable trusts can be beneficial for those in professions that are vulnerable to lawsuits, such as attorneys or doctors.
Joint trusts
A joint trust is a trust established for two people, like husband and wife. While both parties are alive, they maintain total control over any and all assets that are in the Trust. They can change the Trust at any time, and after one partner passes, the surviving partner becomes trustee.
Testamentary trusts
A testamentary trust is a trust that’s created within a will, and it only goes into effect upon your passing. Also known as a “trust under will” or a “will trust,” the last will and testament instructs how the actual trust should be established. Because the trust isn’t truly created until after you pass, it’s not considered a living trust. It’s important to note that this option results in the will going through probate. And, there’s also diminished privacy protection that some trusts offer, as the trust terms are described in the will.
Revocable versus irrevocable trust
A revocable trust can be changed at any point during your life as long as you’re of sound mind. By contrast, an irrevocable trust is the exact opposite. It cannot be changed, and furthermore, you no longer own assets once you place them into an irrevocable trust. It may seem like an irrevocable trust is never a good idea, but under certain circumstances, it actually can be beneficial. For example, if you are at risk for lawsuits due to your profession, an irrevocable trust can protect and preserve your assets from judgments, creditors and liens.
What assets to put into a trust
There are certain assets that are appropriate to fund your trust. To accomplish this part of the process, you will retitle assets with the trust as the owner. The types of assets a trust can hold include:
- Home(s) or other real estate
- Tangible property like jewelry, antiques, collectibles, vehicles, etc.
- Retirement accounts – naming the trust as beneficiary
- Brokerage accounts and non-retirement investments can be retitled in your trust’s name
- Cash accounts, including savings and checking accounts, money markets and CDs – note that transferring CDs needs to be handled carefully so you’re not penalized for an early withdrawal of funds during the retitling process
- Large assets
- Business interests
- Stocks or bonds that are held in certificate form
- Non-qualified annuities
Differences between a will and a trust
The biggest difference between a trust and a will is that a trust goes into effect as soon as it’s created, whereas a will only becomes effective after you pass. There are also tax implications specific to each, and trusts can remain private and avoid probate, whereas the process of passing property per the terms of a will will be both public and go through probate.
Setting up your trust is beneficial on many levels. It’s one of several layers of your estate plan, and it’s yet another safeguard against things happening against your wishes once you no longer have a say. Providing security, passing on your hard-earned personal wealth and assets, and setting up a tax-beneficial estate is one of the best gifts you can leave your heirs. Knowing and trusting that they will be taken care of, even when you’re not there to do it, is priceless.
When using a trust, is easy to designate gifts to your favorite causes, like waterfowl. You can request a free California Waterfowl Estate Planning guide and find additional details on all types of estate and planned giving techniques by clicking HERE.
If you have any questions about trusts or other estate or planned giving topics please contact California Waterfowl Planned Giving Specialist Gordon L. Nelson, CPA, CFP®, at 435-213-9986 or plannedgiving@calwaterfowl.org.
