Trusts are a beneficial estate planning tool. Yet many families think that trusts are only for those with an ultra-high net worth—fancy hotels, fast cars, and glamorous trip types. 

The truth is, a trust can be helpful for people who wish to create a thorough and streamlined estate plan.

Below we highlight what a trust is, what assets to include, and how best to manage a trust over the long term.

Understanding the Value of a Trust

A trust is a legal arrangement that allows one person to designate certain assets to another person. It creates an administrative process that helps structure your wealth distribution strategy. Three parties comprise a trust agreement,

• Grantor—the person who establishes the trust.
• Trustee—the person/entity that manages the trust and takes charge of the distribution. 
• Beneficiary—the person/entity that receives assets from the trust. 

As the grantor, you can actively fund the trust now or name the trust as the beneficiary on specific accounts, so the funds won’t transfer into the trust until you pass away. 

The big thing to remember here is that trusts issue an administrative process that enables your estate to honor your intent. Parents often find an excellent use for trusts. You may not want your 18-year-old to inherit a $500,000 investment account if you pass away. With a trust, you can establish the cadence for your child to access the funds. 

Establishing a trust can save your loved one’s time, paperwork, and even potential tax obligations after your passing.

Revocable vs. Irrevocable Trusts

In estate planning, you’ll often run across two types of trusts: revocable and irrevocable.

Revocable, or living, trusts are the most common, as they provide the grantor additional flexibility and control. You can alter or change the trust terms at any point, which is helpful if your intent changes. A revocable trust effectively keeps your assets out of probate, but it may not protect certain assets from estate tax liabilities (more on this below).

By comparison, you can’t change an irrevocable trust once you create it, and you can’t access any assets in the trust. In some cases, this arrangement may protect your assets from estate tax. Assets owned by an irrevocable trust are no longer a part of your estate, meaning creditors can’t touch them in the event of bankruptcy or other financial hardship.

What Should You Put in a Trust?

When establishing an estate plan, your assets will fall under two categories: easy money and hard money. Items with very little or no tax consequences when transferred are considered easy money, and assets with more considerable potential tax consequences are called hard money.

Trusts are ideal for the transference of easy money, such as:

• Real estate
• Life insurance policies
• Checking accounts
• After-tax brokerage accounts
• Non-retirement accounts

What Should You Leave Out of a Trust?

Remember, “hard money” describes assets that will have more tax consequences after you pass. 

These could include:

• IRAs
• 401(k)s
• Annuities

Rather than putting hard money in a trust, you could leave them directly to a beneficiary. In most cases, a spouse is exempt from paying taxes on the transference of these types of assets.

If you intend to make a minor, like a child or grandchild, one of your beneficiaries, remember that they are not legally allowed to inherit specific assets, including land or property. You may, however, be able to establish a trust to hold certain assets until that child becomes of age to receive them.

How to Manage a Trust Long-Term

Living trusts often don’t receive any assets while we’re still alive. As an estate planning tool, they typically receive assets once you and your spouse have passed.

A trust can be a good place to pool assets together before your beneficiaries can access them. After your passing, the trust can pay for things like funeral expenses, upkeep of your home, bills, debts, and whatever other financial obligations you may leave behind. Once those expenses are covered, the remaining assets within the trust will be split up and distributed to your beneficiaries. 

Using a trust this way is an incredibly effective strategy, as it ensures all funeral and final arrangement costs are covered before distributing assets. If your assets were to be distributed to your beneficiaries right away, the question becomes, “Who pays for what?” when the bills come due, or the mortgage on your home needs paid. 

These uncertainties can make an already stressful situation harder on your loved ones. Proper planning with a well-established trust helps avoid this challenging situation.

Trusts and Your Estate Plan

Here at Legacy Wealth Advisors, we’re firm believers in the power of trusts. We’re happy to collaborate with your estate attorney or other planning professional to determine how they may best fit into your estate planning strategy. 

Our goal is to help you peacefully transfer wealth to family and loved ones in the most effective way possible.

Give us a call anytime to discuss your estate planning opportunities.

Advisory services are offered through Legacy Wealth Advisors, LLC dba Legacy Wealth Advisors, an Investment Advisor in the State of Michigan. The information contained herein should in no way be construed or interpreted as a solicitation to sell or offer to sell advisory services to any residents of any State other than the State of Michigan or where otherwise legally permitted.

All content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Nor is it intended to be a projection of current or future performance or indication or future results. Moreover, this material has been derived from sources believed to be reliable but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed. Legacy Wealth Advisors does not offer tax planning or legal services but may provide references to tax services or legal providers. Legacy Wealth Advisors may also work with your attorney or independent tax or legal counsel. Please consult a qualified professional for assistance with these matters.