Certified Financial Planner and Author
Consider Creating a Trust to Take Advantage of These 6 Benefits

Consider Creating a Trust to Take Advantage of These 6 Benefits

One of the key elements of estate planning is establishing a trust fund, a special type of account that holds assets on behalf of a person or organization. Through a trust fund, you can pass assets to other people and create stipulations about how the money can be accessed. For example, you can put money in a trust for your grandchildren that they will not be able to access until they turn 30. You can also place restrictions on how the money can be used. A trust could be created solely to cover educational expenses, for example.

Trusts follow both the wishes of the creator of the trust (also known as the grantor or trustor) and the laws of the state. Different states have different laws about trusts, so it is important to work with a knowledgeable local attorney when creating one. Trusts offer a number of significant advantages, which is why they are so essential to estate planning. These advantages include:

1. Tax benefits

Depending on the type of trust you create, it could come with significant tax benefits. Trusts are either revocable, meaning they can be changed, or irrevocable, which prevents any amendments.

While a revocable trust allows for changes, this type of trust offers fewer tax benefits. With an irrevocable trust, the assets and their appreciation over time are typically sheltered from estate taxes. At the same time, you will need to pay gift tax on contributions while you are living. You can also make an annual exclusion gift to an irrevocable trust without paying additional gift tax. Thus, you can provide even more of a legacy for your heirs while reducing your—and their—tax burden.

2. No probate

Any asset that you control upon your death will need to go through the probate process to be verified and then distributed according to a will. However, assets in a trust are not subject to this same process. An attorney and the trustee, who administers the trust, can execute the agreement without any court involvement. By avoiding the probate process, you can keep financial matters off the public record while also distributing assets quickly and simply. If you wish, you can stipulate in your will that all assets held outside of it at the time of your death should be transferred to the trust, which can avoid heated court arguments and keep the distribution as seamless as possible.

3. Parameters

One of the biggest benefits of a trust is that you can direct how the assets can be used. You can specify that the money in a trust should only be used for college tuition, for example. Similarly, many trusts include age attainment provisions, which state that a beneficiary must reach a certain age to access the money. In addition, you can limit the amount of money a person receives from the trust each year, which can prevent someone from using the assets up too quickly. Your administrator can walk you through the different parameters available so that you can ensure that your money is used according to your wishes, even after you are gone.

4. Insurance

While wills only go into effect after your die, you can use a revocable trust to provide for beneficiaries if you become ill or disabled. If this happens, a trustee can make distributions from the trust on your behalf to cover bills. When you create a trust, be sure to appoint a person to manage the assets in the account so that this is possible. Thinking about a serious illness or disability is not pleasant, but a revocable trust can serve as a sort of insurance policy. If you are incapacitated, the trust could become an essential account for covering your medical bills and other expenses so that the burden does not fall exclusively on your family.

5. Asset protection

Another important benefit of a trust is its ability to protect important assets, such as a business. If you want your heirs to benefit financially from a business without having responsibility for it, a trust is a great way to accomplish this. You can let your employees continue to run the business but stipulate that a percentage of the profits be placed into a trust. Then, the trustee manages the money and provides it to the beneficiary, without actually putting the business in the beneficiary’s hands. This sort of protection can be helpful in a wide range of circumstances—it can ensure that particular parts of a legacy remain separate from each other.

6. Flexibility

If you create a revocable trust, you can change the terms at any time by creating an amendment to the document. With this flexibility, you can make quick changes when unexpected events occur. For example, perhaps one child has several grandchildren and you would like to allocate more money because of that. A revocable trust makes it possible to write a new beneficiary into the trust without creating an entirely new account. Life circumstances can change quickly, so this sort of flexibility can provide peace of mind and allow you to adjust your legacy accordingly.