There is no one-size-fits-all estate plan, because each person’s life, relationships, and assets are unique. The best way to know if you need a trust is to learn what it is, how it works, and what its benefits and limitations are. Once you know the options, you can decide if this is one of the tools that will work best for you as you create a personalized estate plan.
In this article, we will explain what a trust is and how it operates so you can determine if you need one to accomplish your estate planning goals.
(Related: Wills, Trusts, and Other Tools of Estate Planning)
What is a Trust?
Think of a trust as a legal, fake person. It has a separate tax identification number, can own property, earn income, and buy things, all in the same way a real person can.
Here are a few characteristics of a trust:
- It has a trustee. A trustee is a person who oversees and manages the trust. If you create a trust, you choose who that trustee is, whether that is yourself or someone else.
- It owns the assets you title in its name. Instead of keeping your accounts, house, car, and other assets in your name, you retitle them in the name of your trust. It then owns them instead of you, although you still have control over them until you pass.
- It has at least one beneficiary. Your beneficiaries can be individuals, groups, or organizations.
- It must abide by a legal trust agreement, which is set up at its creation. Even if you, as the trust’s creator, should die, the trust must follow its prearranged rules.
Do I Need a Trust?
There are several reasons someone may set up a trust. Here are two main ones:
The first reason is to avoid probate, the often long and complicated process of validating a will. A trust does not go through probate, therefore avoiding the hassle and burden probate can cause.
The second reason, which we will focus on for the rest of this article, is to keep control of your assets now and after you die. The following are the most common scenarios where you might need to use a trust to control your funds:
- You need to protect minor children.
You can use a minor’s trust to protect your children from getting their inheritance too early. Most people don’t want their children to receive an inheritance at 18 because most people at that age are not ready to handle large amounts of money.
A minor’s trust allows you to choose an age (many people choose age 25) for your children to receive the money. Until they reach that age, your trustee will dole out funds to them for things like health care, education, travel, etc., but they will not receive the full amount until they reach the age you previously decide.
- You need to distribute assets in a blended family.
If your family is non-traditional or blended, distributing your assets can be complex.
For example, let’s say you want to set aside money to care for your spouse while they are still alive. But this can become a sticky situation if your spouse is not the parent of your children. You may not want to give all the money to them for fear your children will not receive anything. A trust allows you to reallocate any assets your spouse does not use before their death to other beneficiaries.
This is just one of many scenarios a blended family may face. Sometimes a trust is the solution to a complicated family dynamic.
- You need to provide for a child or children with significant personal issues.
Sadly, we have many clients who want to care for their children, but who are concerned by their children’s personal issues. A trust can control the funds you leave behind so that they won’t hurt your children. This may be necessary if your child or children are prone to using money in destructive ways, such as for substance abuse or excessive spending. If you choose a wise trustee, he or she can use your money to care for your children without granting your children control of the funds.
- You need to provide for a disabled loved one.
A trust you set up for a disabled loved one is called a special needs trust.
Often, creating a special needs trust for your disabled loved one is better than giving them a lump sum inheritance. Here is why. If your loved one is receiving government subsidy(ies) due to their disability, there are usually financial stipulations attached to those funds. If they earn or receive too much money from another source, they risk losing the government benefits they need. A special needs trust prevents this from happening, as it allows your funds to be used for them but not be owned by them.
If a trust is right for you, first decide what you will do with it and who it will benefit. Then, work with an estate planning attorney who can help you navigate the ins and outs of creating and using this estate planning tool.
If you have more questions about trusts or want to create one, schedule an appointment with us. We would love to sit down with you and walk you through the process.
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