Trust is the foundation of love and one of the key elements of what binds families together. A financial trust can function much the same, helping you to care for the most important people in your life after you are gone.
What is a Trust?
A trust is a fiduciary relationship in which a grantor transfers assets to a trustee, and the trustee then holds the property for the benefit of a beneficiary.
Many people commonly think of a trust in which someone holds onto property for children until he or she reaches a certain age. In this case, the grantor would typically be the parent, the beneficiary would be the child and the trustee would be the financial entity that holds the assets.
Unlike leaving property to your loved ones in a will, trusts generally avoid probate—the legal process of settling an estate. Successfully avoiding probate allows your beneficiaries to obtain their assets more quickly and may even reduce the overall taxes owed. Trusts give you greater control over how your wealth is distributed, allows your family’s assets to remain private and out of the court system and protects your estate from beneficiaries’ creditors.
Types of Trusts
Revocable vs. Irrevocable
A revocable trust is just what it sounds like; it allows flexibility to control the assets in your lifetime. With revocable trusts, you can create an estate plan that will help your family avoid probate while allowing for the possibility that your financial circumstances may change. However, placing assets in a revocable trust does not prevent the grantor from incurring income and estate taxes on those assets.
An irrevocable trust can be used to fully transfer assets from the grantor to the trustee. Once the transfer takes place, the grantor can no longer change the terms of the trust by acting alone. If the grantor transfers all rights in the assets, including income rights to the trust, then the assets may be excluded from the grantor’s estate. However, the grantor may owe gift taxes on the initial transfer of assets to the irrevocable trust.
Special Needs Trust
A special needs trust allows a disabled beneficiary to receive assets that can be used above any need-based government benefits without disqualifying the beneficiary from receiving those benefits. The assets in a special needs trust cannot be used for basic expenses like rent, food or utilities without reducing government benefits. However, they can be used for ‘luxuries’ like furnishings, a vehicle or life insurance policies.
Charitable trusts allow you to achieve your philanthropic goals while still providing for your family. There are two broad types of these trusts. Charitable lead trusts contribute payments or interest to non-profits during your lifetime or a period of your choosing, with your family receiving the remaining assets. Charitable remainder trusts function the opposite way, with your loved ones receiving interest or payments for a number of years and the charity receives whatever remains.
Myths About Trusts
One of the most common misconceptions about trusts is that they are only appropriate for the wealthiest of individuals. On the contrary, trusts can be set up for many income levels. Revocable trusts are a great way to control how the assets for young children will be managed in the event of your death.
Trusts also don’t just benefit the beneficiaries. A living trust can be set up to manage your assets in the event you are incapacitated. In that circumstance, a trust may create less stress for your loved ones and ensure your wishes are followed.
Many people also think that creating a trust is expensive or complicated. It is true that setting up a trust might have more upfront costs than a will, but the savings on taxes could make up for these expenses in the long term.
Steps to Creating a Trust
To set up a trust, you first need to consult with an estate planning attorney. You will need to have an idea of who your beneficiaries are and what assets you would like to place in the trust. Your attorney can help determine what type of trust is the best for your situation (or if a trust is even appropriate). The Trust Company of Tennessee is experienced at this process and can work with your attorney to define the terms and act as your designated trustee.
If you’d like to discuss setting up a trust of any type, please contact us today.