10 Reasons to Start a Trust


There are actually many benefits to creating a trust, even if you're not a multimillionaire.
There are actually many benefits to creating a trust, even if you're not a multimillionaire.
©iStockphoto.com/Edward Bock

While trust funds, or trusts, may seem the province of the wealthy, there are actually many benefits to creating them, even if you're not a multimillionaire. Trusts can help you manage your property and assets, make sure they are distributed after your death according to your wishes, and save your family money, time and paperwork.

Simply put, a trust is legal document established by an individual or corporation known as a grantor. The trust holds property or assets for a specific person or group, called the beneficiary. Control of the trust is maintained by a trustee -- in some cases the grantor is the trustee, and in others the grantor names a trusted family member, friend or professional.

Advertisement

There are many reasons to set up a trust, including avoiding probate, providing for your family after your death, and stating exactly how, and when, your descendants receive their inheritance. But not everyone should establish a trust -- for some, a standard will is a better choice. Although do-it-yourself kits are available, the applicable laws are complicated, and anyone considering a trust should consult a lawyer. But before calling your attorney, read on to learn a bit more about the advantages of a trust.

10

Avoid Probate

Often cited as a key reason for establishing a trust, avoiding probate can mean substantial savings in time, legal fees and paperwork. If your assets and property are to be distributed according to your will, probate is the process by which a judge determines the will's validity. A trust allows your descendants to bypass this process and gain access to the assets and property more quickly. Plus, your family can avoid probate fees, which can be as much as 5 percent of the value your estate [source: Nolo.com]. The probate process is also a long one, and can take up to a year or even two to finalize, during which time your family can't touch their inheritance [source: Nolo.com]. In some states, however, the courts allow beneficiaries a certain amount of money for living expenses while they wait for their inheritance to become available.

9

Contest-resistant

A trust gives you greater protection than a will against legal action from anyone who is unhappy with the distribution of assets and decides to challenge it. This benefit alone may make some people consider a trust a good option. However, the fact that a trust is difficult to contest doesn't mean it is impossible. There are two main ways to challenge the legitimacy of a trust. The complainant can claim that the grantor was mentally incapacitated when setting up the trust -- essentially, that the grantor didn't have the ability to fully understand the responsibilities, risks, benefits and other aspects of setting up the trust. And a trust can also be contested on the grounds that the grantor was under duress or "undue influence" when setting up the trust -- and didn't do so freely. But a trust is still more difficult to contest that a will.

8

Flexible Distribution

Trusts offer flexibility in how assets are distributed. The grantor of a trust can set out in detail how his or her estate is to be distributed to beneficiaries. For beneficiaries who are unable to effectively manage money or who can't be relied on to make sound financial decisions, a trust gives the grantor the option of disbursing funds to the beneficiary in smaller, regular amounts instead of one large lump sum, so the beneficiary can't spend all the money at once. The grantor can also specify how the funds can be spent, for example on rent, food, healthcare, and other necessary or unexpected expenses.

7

Higher Education

  A college trust fund can pay a child's full college tuition and expenses.
  A college trust fund can pay a child's full college tuition and expenses.
Stockbyte/Thinkstock

Another common reason trusts are established is to pay for education. Whether the grantor is paying for one child or several, a college trust fund offers flexibility in how and when money is disbursed for educational expenses. Typically, an education trust will specify that each child's full tuition and college expenses be paid, after which any remaining assets in the trust can be split evenly among all of the children [source: ABA]. In some cases, the children will have different financial needs -- for example, if one child attends medical school, while another simply earns a bachelors degree. The person setting up the trust may decide to give each child the same amount, regardless of the cost of their education, or provide varying amounts depending on each child's educational costs.

6

Charitable Trusts

A charitable trust is a popular way to donate to charitable organizations. A grantor can transfer assets such as money, real estate or art to a charitable trust, and designate that they eventually be given to a specific organization. In the meantime, however, the grantor can continue to use the property. If the assets in the trust are, for example, a summer home or a favorite painting, they can be enjoyed just as much after being put in a trust as they were before -- and possibly more, because the grantor knows that the property will ultimately go to support a worthy cause. And what's more, these kinds of charitable donations are often tax-deductible.

5

Reduce Estate Taxes

An estate tax is a tax on your right to transfer property after your death [source: IRS]. A trust can provide a way to avoid or reduce estate taxes because assets and property placed into a trust are not subject to these taxes. For example, with a children's trust, a grantor can make tax-free monetary gifts from an estate to children or grandchildren. By making these gifts, the donor is reducing the overall taxable amount of the estate, and thus lowering tax liability. However, there are limits to how much you can give without incurring taxes; for 2009, annual gifts up to only $13,000 were nontaxable. This amount is called the annual exclusion, and it applies to as many gifts as you give. So if you have six children and give them each $13,000 over the course of a year, you would incur no taxes [source: IRS].

Estate tax benefits aren't important for everyone, though. While the law is always subject to change, only the wealthiest 2 percent of Americans end up having to pay estate taxes: those whose taxable estates are worth $1 million dollars or more, after standard deductions are taken [source: IRS].

Advertisement

4

Dividing Assets and Property

A living trust can detail who inherits what property, who has the right to use it and under what conditions.
A living trust can detail who inherits what property, who has the right to use it and under what conditions.
©iStockphoto.com/DNY59

Having what's known as a living trust can help determine how difficult-to-divide assets should be split up. In the case of real estate, for example, a living trust can be highly advantageous. With a house, a living trust offers more control than a will in spelling out how such property should be transferred after the grantor's death. A living trust can detail who inherits the property, as well as who has the right to use it and under what conditions; whether the property can be sold, and if so, how the proceeds should be distributed; and how the inheritors of the house can buy each other out if they choose to do so. This way a grantor can ensure that each beneficiary receives equal access to the property. Other assets that could be placed in a trust might a boat or a car that are intended to be used by all of the beneficiaries, or any other property that the grantor might want them to share.

3

Eliminate Family Feuds

Trusts can minimize possible conflict between heirs when an estate is being settled. They are highly customizable, allowing grantors to tailor the document to the needs of their own situations. A grantor can detail the exact items and monetary amounts to be left to each beneficiary. This is particularly helpful when dividing items that heirs may argue over, or items that may have sentimental value. A grantor can decide to leave, for example, a painting to a child who particularly appreciated it, an item of furniture to a relative who is a collector and a car to a grandchild who admired it. With all of the specifics spelled out, heirs have little reason to argue over "who gets what." Trusts offer more control than wills in complex family situations, such as when leaving assets to a married beneficiary. Unlike a will, a trust can be customized so that a beneficiary's spouse cannot gain access to the inheritance without the beneficiary's consent.

2

Help Managing Your Affairs

Many people set up trusts to manage their assets if they become ill or disabled.
Many people set up trusts to manage their assets if they become ill or disabled.
©iStockphoto.com/DNY59

Trusts can help you manage your affairs if you become unable to do so. Many people set up trusts to prepare for the possibility that they may become disabled or ill before their death, and thus unable to manage their assets properly. To obtain this protection, you need to set up a revocable living trust and name a trustee who will manage it. The trustee can take over managing, not only your affairs, but also those of any beneficiaries you've been providing for. Having a living trust and choosing your own trustee avoids a situation where the courts must appoint someone to manage your assets for you. In addition to taking away control of your affairs, a court-appointed guardianship can involve extensive paperwork, delays and other complications.

1

Trusts Are Private

Trusts offer greater privacy than wills because they do not have to go through the probate process.
Trusts offer greater privacy than wills because they do not have to go through the probate process.
iStockphoto/Thinkstock

Trusts offer greater privacy than wills because trusts don't go through probate, so there usually aren't any public records of them. This means your assets and whom you leave them to are kept private. In a few rare cases, there will be a public record, such as if a trust is funded from a pourover provision in a will -- this is when items are transferred from a probate estate into your trust. Also, in some states, you may have to register a trust if it contains such items as real estate and securities, and this will create a public record. However, there may be a way around these obstacles. By placing assets in the name of a partnership instead of a trustee (called nominee partnership) you can protect your privacy. In this case, the assets in the trust are controlled by the partnership, but are still owned by the grantor.

UP NEXT

When Is It OK to Leave Kids Unequal Inheritance?

When Is It OK to Leave Kids Unequal Inheritance?

HowStuffWorks finds out if and when leaving more money to one child than the others is a good idea and how to cut down on the hurt feelings that might result.


Related Articles

More Great Links

Sources:

  • American Bar Association. "Giving to Charities with Charitable Remainder Trusts." (Jan. 15, 2011).http://www.abanet.org/abastore/books/inside_practice/2006/nov-dec/charities.html
  • American Bar Association. "Guide to Wills & Estates." (Jan. 15, 2011).http://www.abanet.org/publiced/practical/books/wills/
  • IRS.gov. "Estate Tax." (Jan. 15, 2011).http://www.irs.gov/businesses/small/article/0,,id=164871,00.html
  • MetLife. "Establishing a Trust Fund." (Jan. 15, 2011).http://www.metlife.com/individual/life-advice/retirement-planning/establishing-a-trust-fund/index.html
  • Nolo.com. "Guide to Living Trusts." (Jan. 15, 2011).http://nolonow.nolo.com/noe/popup/living_trust_guide.pdf
  • USLegal.com. "Trusts." (Jan. 15, 2011).http://uslegal.com/trusts/