PART 2- Where there's a will, there's a way
Trust me, you're going to want to read this….
Welcome to this long overdue installment in the 3 part series where we navigate all the ins and outs of Probate, Trusts, and Estate planning.
What is a trust? Well, in terms of Estate planning and Probate, a Trust is a legal way of designating ownership over funds & assets. It is best described by Fidelity as a "fiduciary arrangement that allows third parties or trustees to hold assets on behalf of beneficiaries". Still confused? I don't blame you, let's dig a little deeper.
A "Trust" is basically a contract. It is a legal document created with a lawyer that creates a separate third "entity" in which all of your assets are then owned by. This removes you personally from ownership (technically. Although you can name yourself trustee… but that is a very complicated rabbit hole we'll delve into later). When a Trust is established, it is generally done for the purpose of avoiding probate and to help simplify tax filings.
When most people hear the words "Trust fund", they think of the ultra rich kid that gets a Mazeratti for their 16th birthday, but Trusts are far more commonplace than we realize and their benefit is further reaching beyond the "1%". As I mentioned, one of the biggest benefits of a trust is to avoid probate. We talked in my previous post about probate, but for a refresher, go re-read that post.
Each type of Trust fund serves a different purpose. That being said, creating a Trust may not be for everyone, so it's best to work with your estate lawyer and financial planner to decide if a Trust is best for you.
A Marital/ "A" Trust- Created to protect the surviving spouse and funds in an estate account. This is beneficial as the funds may be more quickly accessed versus a regular estate or bank account.
Testamentary Trust -This type only comes into effect after death occurs. Basically it takes funds left over from the estate and is not immune to the probate process. This would be the type you'd most likely be suggested to create if you're looking to leave a college fund for your kids.
Irrevocable Life Insurance trust- This handles Life insurance payouts. It provides cash flow to the estate to help pay for things, but makes it exempt from taxable items.
Revocable/Living Trust- This is in application while you're still alive. "Revocable" meaning you can dissolve, change Trustees, or rewrite at any time, but becomes "irrevocable" once death occurs. This Helps to transfer ownership of assets outside of probate, and this is the type of Trust where you can name yourself trustee with a secondary designation who would then become ownership upon your passing.
There are several more types of Trusts, but the ones outlined are the most common.
There are many benefits to a Trust, primarily being, it offers control. A Trust controls who/what receives distributions and on what terms. This is incredibly helpful for surviving spouses,especially those with children, or in scenarios where there have been multiple marriages.
A Trust also provides privacy and protection. Estates are public documents, Trusts are not. It protects the heirs of your estate from losing money to creditors or to the probate process.
Life insurance/ special needs planning is a huge benefit too. Trusts protect the money paid out by life insurance and can provide a consistent income flow for survivors after the death of someone who had become disabled or had special needs during their life.
Trusts also ensure charitable giving. If philanthropy is a passion for you and you wish to make donations after you pass, a charitable trust will ensure the right distributions to the correct entities without interference.
Deciding if a Trust is best is a very personal decision and one that should not be made lightly. While there are many benefits, there are certainly some downsides to establishing a trust. Trusts are costly to establish and take time to put in place. In addition to that, most trusts are cemented in place once created, so having all the information about your financials is crucial. State laws vary vastly, so it is important to consult a lawyer if you think a Trust is beneficial.
What do you do if you opt not to establish a trust? How do you protect your assets and loved ones? In our third and final part, we'll discuss Estate planning where you'll learn everything you need to know about this important but often overlooked component of grief & bereavement.