A trust is a legal vehicle that allows a third party, a trustee, to hold and direct assets in a trust fund on behalf of a beneficiary. A trust greatly expands your options when it comes to managing your assets, whether you’re trying to shield your wealth from taxes or pass it on to your children.
When you hear the words “trust” or “trust fund,” the first image that may come to mind is a wealthy family in a mansion with inherited wealth passed down from generation to generation. However, you don’t have to be a member of the Rockefeller or Gates families to set up and benefit from a trust.
“Trusts are the 700-pound gorilla of estate planning and a very important part of many estate plans,” said Leon LaBrecque, head of planning strategy at Sequoia Financial Group, who is also an attorney and a certified financial planner. “They are a cornerstone of many of the plans I do.”
So, far from being the preserve of the monied elite, trusts are increasingly used by families from a range of economic backgrounds. Here’s how they might benefit you.
What is the purpose of a trust?
Many people create trusts to minimize hassles and fees for their loved ones, or to create a legacy of charitable giving. Trusts can be used in addition to a will to direct your assets after you die, but trusts offer a number of important planning benefits not included in a will, such as allowing your heirs to effect a relatively speedy conclusion to settling your estate.
Working with an attorney or a financial planner, you can create a trust to minimize taxes, protect assets and spare your children from having to go through the often-lengthy process of probate court in order to divide up your assets after you die. So in the event of a sudden and untimely death, an individual’s last wishes can be carried out.
A trust can also enable you to control not only to whom your assets will be disbursed, but also how the money will be paid out — a crucial point if the beneficiary is a child or a family member whose ability to properly handle money is questionable.
You can choose trustees to carry out your wishes as directed in the trust fund.
“This may be an appealing feature to an individual who wants to leave assets to a beneficiary whom the grantor is worried may blow through the money or wants the assets to be directed for specific purposes or last for a specific time,” says Aaron Graham, CFP, a tax planner with Holistiplan in the Columbia, South Carolina area.
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.
How much money is needed to set up a trust?
There isn’t a clear cut rule on how much money you need to set up a trust, but if you have $100,000 or more and own real estate, you might benefit from a trust. There are online options that allow you to set up a trust on your own for a few hundred dollars, or you can go through an attorney, which will likely cost you a couple thousand dollars depending on the complexity of the trust and your financial situation.
But you definitely don’t need to be fantastically wealthy for a trust to make sense, despite their typical association with millionaires and billionaires.
Revocable vs. irrevocable trusts
One of the most common trusts is called a living or revocable trust. It allows you to place assets in a trust while you are alive, with control of the trust transferred after you die to beneficiaries that you have designated.
You might consider creating a living trust for one of several reasons:
- If you would like someone else to accept management responsibility for some or all of your property.
- If you have a business and want to ensure it operates smoothly with no interruption of income flow in the event of your death or disability.
- If you want to protect your assets from the incompetence or incapacity of yourself or your beneficiaries.
- If you wish to minimize the chance that your will may be contested.
A living trust can be a useful option for individuals with even relatively modest estates.
The downside is that while a revocable trust will usually keep your assets out of probate if you were to die, you probably won’t escape estate taxes.
“Revocable trusts are among the most common estate planning vehicles, particularly when there is a desire to avoid the costs and delays that can accompany probate in certain states,” says Bruce Colin, a certified financial planner with his own firm in Rancho Palos Verdes, California.
By contrast, an irrevocable trust cannot be altered once it has been created and you give up control of your assets that you put into it.
But an irrevocable trust has a key advantage in that it can protect beneficiaries from probate and estate taxes. Those setting up an irrevocable trust must also consider other issues regarding how it is managed.
What is the difference between a will and a trust?
While wills and trusts are both legal documents that help determine how your assets will be distributed to any beneficiaries, they aren’t exactly the same. The main difference between a will and a trust is that a will typically goes through a court process called probate after the property owner’s death. The specifics can vary from state to state depending on the size of the estate and type of property held. During probate, a court administrator examines the will and people have the opportunity to contest it. This can be a lengthy (and public) process.
Trusts on the other hand remain private and don’t require court approval. Trusts can be created and go into effect before your death, whereas wills only become active after death.
Special types of trusts
There are also several types of specialty trusts you can establish, and each is structured to accomplish different goals.
Here are a few examples of commonly used trusts:
Marital or “A” trusts
This trust is designed to provide benefits to a surviving spouse, according to Fidelity Investments, and is generally included in the taxable estate of the surviving spouse. It places assets into a trust when one spouse dies. All income generated by those assets goes to the surviving spouse, and the principal often goes to the couple’s heirs when the surviving spouse dies.
Credit shelter trusts
These trusts allow both spouses to take full advantage of their estate tax exemptions, which in 2023 is a whopping $12.92 million per person, or $25.84 million per married couple. Assets above this amount are generally subject to a 40 percent estate tax at the federal level once the second spouse dies.
When dollar amounts up to the threshold are held in a credit shelter trust, the surviving spouse can receive income from the trust’s assets until death, at which point the trust’s beneficiaries receive the trust’s assets free of estate taxes.
Charitable remainder trust
This type of trust allots a given amount of income for beneficiaries for a defined period of time and the remainder goes to specified charities.
How to create a trust
It can be relatively easy to create a trust, but you’ll still want to call in an expert, such as a lawyer with experience in trusts, to do so. Here are the steps to create a trust:
- Figure out why you want the trust. Determine why you want a trust and which kind might be useful. Do you need a living trust or one that provides tax benefits? Do you need one that protects your assets from an incompetent beneficiary? Some trusts are more tricky to create than others, so your needs will inform who you hire.
- Interview prospective lawyers. When you know what you want from a trust, it’s time to contact lawyers and see what they can offer. Not all trusts are the same, so be sure your potential future lawyer has the specific expertise you need. You should also see what the lawyer charges for the service. You might expect to pay at least a couple thousand dollars for a basic revocable trust.
- Establish the trust. Once you’ve selected a lawyer, you’ll have to work with the expert to craft a trust that meets your needs. Make sure you understand clearly what your trust can and cannot do, so that you’re getting what you pay for.
You also have another route to creating a trust. You can sidestep the costly attorney’s fees and still create an effective trust using a site called FreeWill. FreeWill offers a completely free way to draft the necessary documents, and as its name suggests, you can also set up a will at no cost, too.
Regardless of how you proceed, you need to understand how the trust serves your needs and helps carry out your wishes.
Bottom line
When considering a trust, it’s useful to seek professional advice to make sure you’re making the right decision for yourself and your loved ones. An estate planning attorney or financial advisor can provide you with expert advice about whether a trust could be a useful component in your long-term financial plan.
“You just have to remember that a trust is an entity, just like a person, and sometimes it makes sense for that entity to own something for the benefit of someone else,” according to Lora Hoff, a CFP in the Dallas area whose practice focuses on medical professionals.
— Scott B. Van Voorhis and Brian Baker also contributed to this story.
