What Is A Trust (And Should You Have One)?

What comes to mind when you think of a trust?

Probably a wealthy kid with too much gel in their hair, a sweater vest, a tie, and a yacht. Were we close? Trusts are often associated with the upper-class old-money, so-to-speak, but trusts play a much bigger role and have a broader reach than that. Trusts are actually quite an accessible and ubiquitous tool used by many families as part of a strong estate plan.

What is a trust? How does it work? Should you include one as part of your estate planning strategy? Let’s discover the answers together.

The basics of a trust

A trust is a fiduciary relationship that enhances the safety and control of a person’s assets or property. This relationship consists of three distinct parties:

• Grantor: The person who establishes the trust and wants to pass down assets to another person or entity.
• Trustee: The third-party person or entity (bank) who controls and manages the assets from the grantor.
• Beneficiary: The eventual recipient of the assets or property.

So how does it work? In essence, the grantor works with their attorney to create a legal stipulation for how and to whom their assets will be distributed either while they are alive or after they pass away. This team works together to decide how to transfer assets to the trustee who then holds and manages the assets until they can be properly distributed to the chosen beneficiary. 

Trusts are used in a myriad of ways with the ultimate goal of keeping assets safe and secure. Depending on the type of trust you establish, they can go into effect while you are living, become incapacitated, and after you pass away making them a much more flexible arrangement than a will, which only becomes valid after death. 

Key benefits of a trust

Trusts are common in estate planning for many reasons, chief among them protecting and securing assets from one person to another. But there are a number of other important benefits that a trust offers:

• Protect assets from creditors 
• Safeguard assets after a divorce 
• Increased flexibility
• Less paperwork
• More tax-efficient
• Time-saver
• Privacy

Trusts often avoid probate, a public, legal proceeding where your estate plan becomes “valid” in the eyes of the law. This process settles your estate and ensures that wishes stipulated in a will like property, assets, guardianship, etc. actually occur. 

Many people wish to avoid this process if possible as it can be costly in court and legal fees and makes your estate a public matter. By avoiding probate you are able to maintain privacy and ease during the already difficult task of managing and dividing an estate. 

Are there different types of trusts?

The short answer to this question is yes. There are so many different types of trusts that you can establish based on your unique circumstances and needs. But today we are going to divide trusts into a few broad categories: revocable vs irrevocable and living vs testamentary. Remember trusts can fall into one or more categories. 

The big difference between a revocable and irrevocable trust is when and how it can be changed or altered. A revocable trust can be altered or terminated during a person’s lifetime. This type of trust can bring flexibility and even additional income into the grantor’s life. The terms can be adjusted to suit your needs while living and the assets/property transferred to the chosen beneficiaries after you pass away. 

A revocable trust can offer more flexibility but that doesn’t come without a cost. These types of trusts are often expensive to maintain, don’t have tax advantages for the grantor, and require additional leg work to ensure all assets are adequately and comprehensively protected. 

An irrevocable trust, on the other hand, can’t be changed, altered, or terminated after it is created. Once it is created, the terms are written in stone. This can be beneficial in terms of protection from creditors and mitigating estate taxes. 

A living trust, also known as inter-vivos trust, allows the grantor to establish and fund the trust during their lifetime. They are also able to use the funds for their benefit throughout their life. The assets are then transferred to the selected beneficiaries upon the grantor’s death by way of a successor trustee. A living trust can be either revocable or irrevocable depending on how it is set up. 

A testamentary trust, otherwise known as a will trust, goes into effect after a person’s death. Testamentary trusts are always irrevocable as they aren’t funded or created until the grantor’s death. 

Why consider a trust?

A trust is an excellent vehicle for controlling your wealth and assets, especially where multiple generations are concerned. By establishing a trust, you are able to provide a direct line of where your asset will go, to whom, and also how they will be distributed. This can be especially helpful if you have minor children or other beneficiaries who might benefit from a structured approach to their inheritance.

Using a trust can also help you establish your legacy and increase both your and your beneficiaries’ propensity for charitable giving. With a charitable remainder trust, for example, you can select a certain percentage of your assets to be given to your beneficiaries with the rest of the money to be distributed to a charity. This adds a charitable dimension to your estate plan and can help establish your legacy of giving even after you pass away. 

A trust really allows you to customize the way you divide your estate and can do so in a safe, tax-efficient manner. 

Our team at Legacy Wealth is here to help you live out your legacy each and every day. Part of that legacy means ensuring that your family and loved ones are well protected and taken care of after you are gone. This means that a strong estate planning strategy should be an integral part of your retirement plan. 

Estate planning isn’t easy, but that is why we are here to help you assess your needs, protect your assets, and let your legacy live on for generations to come. Are you interested to learn more about how a trust could impact your estate plan? Schedule a 15-minute call with us today.