This flexible and powerful financial vehicle isn't just for the wealthy. Find out if creating a trust makes sense for you and your family.
You're likely familiar with essential
estate planning documents like a will or power of attorney, but you may not have thought much about another valuable financial vehicle — a trust. At its most basic, a trust is simply a legal entity that can own assets like investments or property — a container of sorts. Adding a trust to your estate plan can help protect your assets in case you're incapacitated and ease the process of distributing what you own to your loved ones after you die. "Essentially, a trust is a more efficient estate planning vehicle than a will alone," says Jason Albano, managing director and wealth strategies executive at Bank of America.
While trusts are not just for the wealthy, the wide variety of them and their seemingly tricky rules can make them feel intimidating.
How a trust works
You, the grantor, establish the trust, transfer assets to it, and pick a trustee (or trustees) to manage the assets and name beneficiaries to receive the benefits. As the grantor (or creator) of the trust, you can also serve as the trustee. With a trust, you can provide specific instructions for when and how those assets should be distributed and used by the beneficiary.
Here's what else you need to know so you can decide whether a trust should be part of your plan.
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What are the main types of trusts?
Trusts go by several different names and serve various purposes, but one of the key distinctions is whether the trust is revocable or irrevocable.
- Revocable: When you transfer assets to a revocable trust (also known as a living trust), you remain the owner of the assets during your lifetime and can use them as you wish — and you can also amend or dissolve the trust at any time. At your death, the trust generally becomes irrevocable, and the trustee distributes the assets to your beneficiaries based on the terms you laid out. "A revocable trust is a simple and effective way to transfer wealth," says Albano.
- Irrevocable: When you establish an irrevocable trust, you permanently relinquish control of the assets and remove them from your estate, which can offer protection from creditors, lawsuits and divorcing spouses — as well as potential tax benefits. "People typically use irrevocable trusts for legacy planning and to transfer wealth to multiple generations," Albano says.
What are the benefits of a trust?
A trust offers a variety of benefits, both during your lifetime and after your death, such as these:
- Peace of mind in an emergency. If you have moved your assets into a trust and become incapacitated, the trustee or your successor can step in to manage them. Your trust document should spell out who should act as trustee if you can't and how your assets should be used for your benefit.
- Greater control. A trust allows you to have a more precise say in what happens to your assets than a will does. That might mean setting parameters such as ages when children can receive the funds. A trust can also provide ongoing money management instructions — something to consider if your loved ones will not be interested in or capable of that.
- Faster settlement of your estate. Your will must be authenticated in probate court, which can hold up the process for months. Assets in a trust avoid probate, allowing your loved ones to receive them more quickly. Also, a will is a public document; the terms of a trust remain private.
- Estate tax savings. Transferring assets to an irrevocable trust removes those assets from your estate, potentially reducing future estate taxes.
- Security for a loved one with disabilities. When you have a family member with special healthcare needs, you can use a type of trust called a special needs trust to support them financially after you die without endangering their eligibility for government benefits.
- Simpler property transfers. If you own real estate in more than one state, your heirs will have to go through probate in each state. "Probate can be costly, time-consuming and complex when multiple homes are involved," Albano says. "If a trust owns those properties, the transfer of ownership is seamless."
What assets can you put in a trust?
You can transfer ownership of investment accounts, your personal residence, commercial real estate, a business, a family limited partnership and other high-value property to a trust. Typically, you don't put designated retirement accounts in a trust since when you die, those assets easily pass to the
beneficiaries you've named. You can also keep checking and savings accounts outside of a trust so that a trusted person can quickly access that cash to pay immediate bills, such as funeral costs and final medical bills. (To make that possible, complete a "transfer on death" document for the accounts.)
Do you need a will if you have a trust?
Even when you include a trust in your estate plan, you should still have a will. A will names the executor who will get access to your savings after your death to pay your bills and distribute personal property that's not in the trust, such as a car and sentimental and household items. With minor children, you need a will to name guardians.
What's involved in setting up a trust?
You can discuss whether a trust is suitable for you with a
financial advisor or an estate lawyer. But if you decide to set up a trust, you will have to hire a trust and estate attorney to draft the trust document or use an online legal service. In addition to initial legal fees, you may face ongoing expenses, especially with an irrevocable trust, such as administrative, asset-management and tax preparation fees.
Who should consider creating a trust?
Setting up a trust takes time and money. You'll want to make sure the benefits to you and your loved ones justify the expense and the work. One consideration is the value of your assets outside of your retirement accounts, but a trust may make sense at any level of wealth. Your goals and situation should be the deciding factors, Albano says. "Anyone who's concerned about transferring their wealth, has property in multiple jurisdictions, or wants to put protections in place for the people inheriting the wealth should consider a trust."