When most people hear the word “trust,” they think of the ultra wealthy. And for good reason. Many wealthy people use trusts to protect their assets from estate taxes and other financial threats, and to pass along fortunes to children and dependents.
But trusts can be used for a number of purposes beyond just saving on estate taxes.
Here are a few of the reasons you might want to consider a trust as part of your financial and estate plan. I’ve also included a brief description of some of the types of trusts people have used in these situations.
What if you become incapacitated? It could happen. Having some of your assets in a properly constructed trust could help ensure that these assets are available for your use during your lifetime, while also ensuring that a successor trustee (whom you appoint) would be available to manage them should you become incapacitated or die. Typically, this type of situation uses a revocable trust, also known as a “living trust.” You can appoint yourself as trustee or co-trustee and retain control over the terms and assets during your lifetime. You, as the creator of the trust, can also make changes to it at any time should your circumstances or needs change.
Are you part of a blended family? You can use a trust to provide income for your surviving spouse, while ensuring that the assets are distributed to your heirs according to your specific wishes and instructions. In other words, this could ensure that assets go to any children from a previous marriage after your current spouse dies. For this situation, a properly constructed qualified terminable interest property (QTIP) trust might be the solution.
Are you concerned about a child’s special needs or protecting a legacy against mismanagement by an heir? A special needs trust can be set up to provide additional money to an heir or child with a disability without compromising the individual’s benefits available under government assistance. By placing assets in a trust, you can also help protect those assets for an heir who may not be capable of managing them or might need the assets protected from a creditor or his or her own spendthrift ways. A revocable or irrevocable trust can be used for this purpose. However, be aware that an irrevocable trust is just that – irrevocable, cannot be changed or dissolved by you once it is created.
Want to help your heirs avoid the costs and delays of probate? Any assets you leave in your will – and I’m going to assume you’ve already taken care of preparing a will – must pass through your state’s probate process. Depending on the state involved, this can be a very time-consuming ordeal, in some cases, lasting more than a year. There are also fees involved with probate and generally probate records are public. By putting assets into a trust, you can avoid having those assets go through probate. Instead they can go directly and privately to the heirs and beneficiaries as designated by you when you create the trust. No court delays. No court fees.
These are just some of the situations that may apply to you where a trust could be of benefit when establishing your legacy plan. As you can see, even if you’re not one of the 1%, a trust might be a perfect fit depending on your personal concerns. The best way to find out is to consult with a tax or estate advisor. And, now when you do, you’ll know some of the questions you should ask or discuss with your advisor to ensure that the financial legacy you do leave is the one you intended to leave.