A trust is an agreement that allows a trustee or a third party to hold on to assets on behalf of the beneficiary. Trusts are added to a will if the beneficiary needs to expand on the terms of the will, but do you need one? That depends on your estate and your financial goals.
The following article on estate planning should not be considered financial advice. Seek your own financial advice from a professional if you are uncertain about how investments are taxed or want financial planning assistance.
Why you should consider writing a trust
There are plenty of good reasons to write a trust, such as leaving your savings to your children. However, you can leave your assets to your children with just a will, so why get a trust?
1. You have control over asset distribution
A will tells the courts who gets what when you die, but it can’t dictate how the beneficiaries will use these assets. If your family has a dispute over your assets after you’re gone, they’ll have to take your will to court. Unfortunately, this happens more frequently than you’d think.
But when you set up a trust, you can dictate exactly what your beneficiaries will do with your estate and your money. Not only can this prevent familial problems, but it can also save your family a lot of money. You can even name a successor to take control while you’re alive.
2. You can create the right situation
Instead of gifting the entire trust at once, you can give it out in increments (monthly or yearly) under a certain percentage. You can also set up special trusts that meet your specific goals.
For example, you could set up a trust fund called a “third-party special needs trust” that includes instructions about the beneficiary’s health or Medicaid. A “spendthrift trust” is created to give an irresponsible beneficiary the trustee’s estate but not the authority to spend it themselves.
3. You can pass on your wealth quietly
When you pass on your wealth with just a will, you have to go through lengthy probate proceedings. These are often costly, cause delays, and must always be placed on public record.
If you’re uncomfortable with putting your family’s financial matters out in public for anyone curious enough to look it up, then you should always write a trust. Besides the privacy issues, the lack of a probate process will ensure the transfer of assets is streamlined and smooth.
4. You can usually revoke a trust
A major distinction between the multiple trust types is whether they’re revocable or irrevocable. A revocable trust, also called a living trust, allows you to pass your assets outside of probate, but you keep control over them. You can dissolve a revocable trust any time before your death.
An irrevocable trust can’t be altered, and you lose control over your assets when the trust has been executed. If you want to reduce your estate tax when you transfer your assets on behalf of a beneficiary, use an irrevocable trust. If you want flexibility, get a revocable trust instead.
5. You can avoid state taxes
While the beneficiaries of a trust will pay taxes on the distributions they receive from the trust’s income, the trust itself won’t pay the tax. The beneficiaries are also subject to taxes on the principle, but keep in mind that you’ll receive more tax advantages with an irrevocable trust.
You’ll have to meet certain requirements to avoid the gift tax requirement you’ll be charged during your lifetime. Besides the initial funding round, you can also make an annual exclusion gift to an irrevocable trust up to a certain amount and not pay taxes on your contribution.