Most people have a deep reaction to the idea of ”trust”. Oftentimes, the term conjures up an image of families with enormous wealth that support a “Child Trust” or create complex financial structures intended to avoid income and estate taxes.
In general, the idea is that a trust is something for the wealthy (Rockefeller, Ford, Gates) for charitable causes and possibly future generations. Sometimes, this may already be the case. Often, however, trusts are a legal means that is easy to understand and used to protect one’s assets and to ensure that those assets are properly managed and ultimately distributed to the intended beneficiaries in accordance with the wishes of the person who created the trust. As someone who has recommended and managed trusts throughout my career, I know that carefully constructed and properly managed trusts can be valuable tools that can benefit individuals across the social and economic chain.
Examples of trust
The list of different types and uses of trust is much longer than the space here allows. Let me describe a few situations, though, where trust can help fulfill the intentions of the person who creates it (the settlor):
- living confidence It can greatly facilitate the passing of assets upon one’s death, reducing or eliminating the time-consuming and sometimes costly process known as probate. Living credit can also provide asset management by a third party at some point in life, due to age or illness, when one cannot effectively manage their assets;
- Asset Protection Credits, which is self-explanatory, is especially useful for those who work in highly responsible professions such as medicine.
- My husband’s credit (You may have heard the term “QTIP”) Especially useful when there are children from previous marriages. Upon the death of the person, the marital trust can provide income to the surviving spouse, ensuring that upon his death, the remaining assets are distributed to the children of the settlers;
- Special Needs Credit (SNT) can be used to allocate funds to a disabled child, without affecting the child’s ability to receive government support;
- Medicaid credit It may protect assets that may be depleted through living expenses or hospice care;
- expend confidence It can protect immature or irresponsible children from themselves;
- And there are many other gift and real estate uses for trusts that can actually save taxes, and can elegantly tackle complex family situations—like the ages at which children receive their inheritance.
A trust is a legal entity created by law. Here are some key elements of how trust is created and how it works.
Once a trust is established, it is subject to its own trust document, which is essentially an outline of its operations outlining the purpose of the trust, the various parties to the trust, and its operations.
The person who establishes the trust, the “settlor”, can establish it while alive (the trust among the living) or the trust is established at death by his own will (the bequest trust). The trust can be revocable (the settlor changes it at any time) or irrevocable (it cannot be changed once it is created). Once a credit is created, it can be funded for now, or left unfunded until later. For example, a credit can be initially created to hold an insurance policy, which will receive insurance proceeds upon the death of the settlor.
A credit is created in favor of one or more beneficiaries. As the term “beneficiaries” suggests, these are the people (or entities such as, for example, charities) who will benefit from distributions from the trust.
A trust requires one or more “trustees,” the person, persons or organization (known as a corporate trustee) that accepts the transfer of assets on behalf of the trust. The trustee is responsible for managing the trust in accordance with the provisions of the trust document. The trustee has a fiduciary duty towards the beneficiaries of the trust. That is, the trustee must always put the interests of the beneficiaries above his own.
That’s a lot to suck up on! Establishing a trust always requires the services of a lawyer experienced in setting up and working with trusts. The attorney will allocate the trust document according to the wishes of the desired outcome of the settlor. The trust documents are very strict and the trustee must follow their provisions carefully. The attorney will review the provisions of the trust document with both the settlor and the trustee so that everyone is on the same page.
Funds can be very elegant financial planning tools that can be useful in providing solutions to many of life’s financial problems. In future columns, I will discuss specific types of trusts and how they can be beneficial to you and your family.
The author does not provide tax, legal, financial or investment advice. This material has been prepared for informational purposes only. You should consult your tax, legal, financial and investment advisor before engaging in any transaction.