In recent years, the term “trust fund” has become synonymous with spoiled teenagers who don’t have a care in the world beyond when their driver is going to pick them up from their gated mansion situated snugly between the Rockefeller and Vanderbilt homes.
However, that’s far from the truth.
Let’s leave the negative connotations behind and take a realistic look at the ins and outs of trust funds — including an overview of what a trust is, how a trust works, the process of setting up a trust, and beyond.
What is a Trust?
Trust funds, or simply “trusts,” are centuries old.
It’s thought that the Romans may have been among the first to adopt trust-like rules for passing assets down generation by generation. However, the rules we follow today are more similar to practices developed in the Middle Ages.
A trust is a legal entity that enables a person to set guidelines as to how their assets will be managed when they’re no longer around the manage them. There are several benefits of creating a trust in addition to a will — which we’ll explore in more detail later in this article — which is what makes it one of the most important elements in the estate planning process.
“Trusts are the 700-pound gorilla of estate planning and a very important part of many estate plans,” said Leon LaBrecque — attorney, financial planner, and chief growth officer at Sequoia Financial Group. “They are a cornerstone of many of the plans I do.”
There are many types of trusts: Domestic asset protection trusts, marital trusts, charitable remainder trusts, and so on. But when you read or hear about trusts, most often they’re a type of living trust. Also called a revocable trust, a living trust allows you to retain control of your assets and the trust itself while you’re living. An irrevocable trust takes full control of your assets immediately and can’t be changed once it’s created. While this kind of trust may sound scary, it has the most benefits as it offers the most protection against taxation, collection, and other threats to the wealth you wish to pass down.
How Does a Trust Work?
A trust has three main parts.
First, the grantor is the person who creates the trust in order to manage the way their assets are handled after death. The grantor can put pretty much anything they value in the trust — cash, investments, businesses, real estate, and even those doodles from their old pal Picasso.
The grantor sets up rules that an intermediary — called the “trustee” — will use to manage these assets to the benefit of the beneficiary. These rules can dictate just about anything, such as how an asset can be used (maybe you don’t want your artwork to be sold) to when an asset can be used (maybe you think it’d be better that your grandson doesn’t access his inheritance until he turns 25). And while the trustee can be a family member or friend, there are also paid professionals who can take on this task, which may span the course of years depending on the trust.
This leads us to the beneficiary or beneficiaries, the person or people who are lucky enough to have been named as a recipient of the assets or the proceeds from the assets in the trust.
5 Reasons for Creating a Trust
Now that you’re familiar with how trusts work, let’s explore the reasons you may have to create one before we discuss the steps to setting up a trust fund.
Provide Private and Painless Asset Distribution for Beneficiaries
After you die, the last thing you want to leave behind is a big hassle for your family.
This is where a trust fund comes in.
A trust is one of the best ways to make sure your assets land in the right hands quickly — and quietly.
Without a trust, your heirs may be subject to probate before they can take legal possession of any assets. Probate is a process in which a judge grants permission for an asset to change hands. If your estate is large or complex in any way, this process can drag on while a judge — instead of a trusted family member or friend — doles out your assets. There is also no guarantee this process will be kept quiet, meaning your assets and heirs will be exposed to unwanted scrutiny and solicitation.
A trust can help make the process following your passing more private and painless for those you loved.
Take Charge of Your Legacy
A trust also enables you to control your assets in a way that continues your legacy after you’re gone. You may choose to set up ongoing charitable giving, set directives that keep a successful business in the family, and make other arrangements to keep your hard-earned wealth working for your beneficiaries for generations to come.
Create Tax Benefits for Beneficiaries
For high-net-worth individuals, trusts are a vehicle for gifting millions in assets to beneficiaries without requiring them to pay gift or estate taxes. Bypass or family trusts, insurance trusts, and charitable trusts can also help beneficiaries save money — whether people or organizations — on tax fees.
If tax benefits are something you’re interested in for your beneficiaries, be sure to consider different kinds of trusts when it comes time to create your own.
Pass Along Your Values in Addition to Your Wealth
Trusts aren’t just for appointing who will benefit from your assets but under what circumstances they will benefit from them, as well.
This may interest grantors who wish to leave assets to beneficiaries who are too young or inexperienced to manage them immediately. Of course, grantors might also be interested in, ahem, encouraging beneficiaries to achieve certain milestones that align with their personal values before they are able to access the assets bequeathed to them.
These so-called “incentive trusts” can mandate that a beneficiary complete a certain level of education, take on a specific career, or even get married before the trustee can dole out their benefits.
But tread carefully, for these types of trusts can certainly go wrong. Attaching strings to an inheritance can really put a damper on the generous gesture, especially for younger heirs who may not desire to live the same lifestyle that an elderly grantor imagines for them. And if the parameters set by the grantor are too subjective, it may be hard for a trustee to determine when a beneficiary is truly ready to receive their assets — if ever.
Maintain Control of Your Assets Even Late in Life
A revocable or “living” trust that’s set up when a grantor is of sound mind can help them maintain control of their assets even if old age or illness makes them less able to actively manage them. This is a unique function of a trust that a will cannot match.
Since most trusts are set up to automatically become irrevocable once the grantor dies, a living trust that’s meant to control assets until the end of life will still play out as usual when the time comes to enact it.
How to Set Up a Trust
Creating a trust fund that serves both you and your heirs is all about preparation.
The main elements you want to consider when you’re sitting down to create a trust are:
- The name of the trust
- The description of the trust, which will include the basics of why you’re creating it
- The name of the trustee (Like we mentioned earlier, this job can also be given to a professional such as an attorney or accountant. Remember to allocate a budget for their fees within the trust.)
- The responsibilities and abilities of the trustee (Can they take ownership of any assets in the trust? Can they sell assets from the trust? Etc.)
- The name(s) of the beneficiary(ies)
- The conditions (if any) under which beneficiaries will receive assets or benefits from the trust
- The property that will be owned by the trust (For property for which you have a title — such as vehicles, homes, and stocks and bonds — you can transfer the title to the trust.)
- What should happen if the grantor, trustee, or beneficiaries die, lose their faculties, or wish to give up their responsibilities in the trust
Once you’ve thought through all of the details that go into creating an effective trust, we highly recommend contacting a licensed attorney to draft the actual paperwork, known as the “trust agreement,” or at least put their stamp of approval on it.
You’ll want to look for a trust and estate attorney, especially one with experience in your location and with any unique situations you may be dealing with. The cost of establishing a trust fund will of course vary based on complexity and location. It’s recommended that you set aside up to $3,000 and expect to spend no less than $1,000 on setup and consultation fees to make sure your trust is valid and legal.
Have You Set Your Heirs Up for Success?
We hope this article has shown you that trust funds aren’t just for the uber rich. In reality, they’re for anyone who wants to set their heirs up for success with a specific plan for gifting their assets — and maybe even a bit of their legacy — painlessly, privately, and affordably.
Especially in the uncertain environment that COVID-19 has created, it’s never too soon to start thinking about what will happen to your estate, your assets, and all your critical financial and legal documents in your absence.
In fact, it was this exact concern that led Rohit Nadhani to found Kubera.
After a near-death experience inspired Nadhani to take stock of his assets, documents, and beneficiaries; he realized he had no way to collect all of his assets and documentation in one place nor grant access to a specific beneficiary if he was suddenly no longer able to manage them.
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Don’t just invest in your own future, invest in the next generation’s future with a trust fund and the only portfolio tracker that’s capable of automatically putting it in the right hands when the time comes. Sign up today and take the free trial to see if it’s right for you — no credit card required.