Trust Fund Legal Documents

Financial Fitness

Trust Funds Aren’t Just for the Rich

by Kaycee Cuaira

Trust funds have a reputation for being the sole province of wealthy people—who hasn’t heard a child of a celebrity or tycoon being referred to as a “trust fund baby”? That is because wealthy families have often used trusts to protect their relatives from losing their inheritance due to divorce, bad business ventures, or bad money management.

If that is the context in which you have always thought about trusts, then you may not have considered setting up a trust as part of your estate planning if your net worth doesn’t number in the millions.

That may be a mistake.

While trusts may not be a necessity for absolutely everyone, there are numerous advantages to be had from having a trust. If those benefits are important to you, you should definitely consider setting up a trust. Whether you are a single mom, a millennial with just a few years in the workforce, in a domestic partnership, or married with kids, a trust could be the right option for you.

What is a trust, anyway? 

A trust is a legal entity that is created by someone (the grantor) to hold assets like property, stocks, money, etc. on behalf of another person, persons, or organization (the beneficiary), and administered by a person or organization (the trustee).

Are there different kinds of trusts?

There are a number of types of trusts, but they can be divided into two basic types. Trusts can be either the kind that is immediately available to the beneficiary (living trust, also called an inter vivos trust), or the kind that only kicks in after your death (a testamentary trust).

A testamentary trust is what is generally used in estate planning. It is incorporated into a will and is created through the will after you die. Testamentary trusts are irrevocable—they cannot be modified or canceled.

A living trust is one that you can create while alive. Living trusts are generally revocable and generally become irrevocable when the grantor dies. Revocable trusts can be modified or eliminated.

What does a trust do?

A trust allows assets to be managed in a certain way. For example, you can set up a trust and instruct the trustee to distribute $20,000 per year plus an annual adjustment for inflation to one of your survivors. Or you can instruct the trustee to invest a portion of the trust fund assets. You can also make trust fund disbursal contingent on some condition—like not giving trust funds to an heir unless they finish college, for example. It’s your trust and you can decide under what guidelines the trustee should distribute the trust assets.

Why should I have a trust? 

First of all, you may have more money than you think. If you are married, and you and your spouse both have insurance policies and own a home or other property, you may be surprised to learn that your net worth could be more than $1 million. If that is the case, you may want more gradual control over the disbursal of your estate assets than what a will can provide.

Or you may wish to set up a trust as a precaution, in case you reach a point where you are incapacitated and unable to administer your own household and finances.

Other reasons for setting up a trust could include maintaining your privacy, taking advantage of tax breaks, providing for minor children, and making cash available to pay any estate costs.

Privacy concerns

A big advantage to a trust for anyone who has privacy concerns about the contents and administration of their will is that the trust keeps your estate fairly private.

Once wills are filed with a probate court, after your death, they become public record. Any nosy neighbor can look up your will once it has been filed with the court.

Trusts, on the other hand, do not need to be filed with the court, and the probate court does not supervise your appointed trustee. Some states do require that a copy of the trust is given to beneficiaries if they request it (either the whole thing or only the part that applies to them, depending on the state), and some states require copies of the trust documents to be given to close relatives who request it.

Also, in some cases, if a relative sues your estate over the trust, the trust will become public record as part of the lawsuits. But outside of these limited exceptions, a trust is a great option for anyone who is privacy conscious.

Tax purposes

There could also be some tax benefits that can come from creating a trust, such as potential estate, gift, and income tax breaks. For example, if you want to give money to your kids or grandkids for school, you could potentially set up a living trust and use it to give gifts above the $14,000 gift tax threshold without having to pay a gift tax.

There are also ways you can set-up a trust to avoid the bulk of estate taxes, or to avoid paying taxes on a property that will be passed on as part of your estate, though to be fair most estates won’t be large enough to have to pay estate taxes. It just depends on the type and details of the trust.

Minor children

A great advantage to a trust is being able to provide for minor children in case you pass away before they are adults. You can decide how much money should be given to them while they are minors, and how much should go towards paying for their living costs. This can be especially important if you are a single, divorced, or widowed parent.

Cash

Another advantage to setting up a trust is providing your heirs with access to cash in order to pay any estate expenses. If you have a trust that is funded by a life insurance policy, you can avoid gift and inheritance taxes on the insurance payout while providing access to liquid assets to your heirs if they need to pay fees on the estate.

Protect your estate from challenges

In general, trusts are more bulletproof than wills. Challenging the terms of a trust is more difficult than challenging the terms of a will, because the standards for invalidating each are different.

For a will challenge to be successful, someone contesting it just needs to show that the person was not in their right mind when they signed the will. Challenging a will is done in probate court and costs the challenger very little.

For a trust, on the other hand, a challenge must be filed in civil court, and court and attorney’s fees must be paid by the challenger.

Who can a trust benefit?

Single Parents

If you are a single parent, having a trust is especially important, because there is no backup parent to manage your estate and take care of any minor children if you pass away. Setting up a trust can provide you with peace of mind, knowing that you have provided as best you can for your minor children’s expenses and guardianship according to your wishes.

Millennials

Trusts are an important tool for millennials as much as for those of any other generation. But for a typical Millennial, just thinking about planning your estate is important. Even if you do not own a home, or are single, or your job doesn’t pay as much as you would like. And if you do have a home, or are married, or earn a great salary, a trust becomes even more important. If privacy, tax advantages, and avoiding will challenges are important to you, either create a trust or set a goal of having a trust set up within the next few years.

Domestic Partnerships

If you are in a domestic partnership, but you want to make sure you can pass on your estate (or part of it) to your partner, setting up a trust will give you extra protections against an estate challenge. In many states, immediate family takes priority if there is any dispute about the validity of a will. Setting up a trust offers better protections against potential challenges to your estate by family members.

Nuclear Families

Trusts are important for nuclear families for reasons mentioned above (a couple and their dependent children) and because it gives you a way to provide for your dependents if they are still minors when you pass away. If both you and your spouse die at the same time, for example, having a trust set up for your minor children can help make sure their expenses are covered as needed until they are adults.

LGBTQ Couples

Same-sex marriage is legal in every state as a result of the 2015 Supreme Court decision in Obergefell. Prior to Obergefell, some states did not permit same-sex marriage, and therefore estate planners had to build in extra protections–trusts, etc–to make sure that estate plans leaving assets to a same-sex partner were enforceable.

Although the concern is no longer the same, setting up a trust can help you avoid challenges to your estate. Family members challenge wills more often than you might expect, and if you have family members who are likely to challenge your estate because of their prejudice against your partner or spouse, you may want to set up a trust instead.

Why would I not create a trust?

There are a few potential drawbacks to creating a trust. There are costs associated with creating, maintaining, and distributing a trust, and you may not be interested in shelling out the money required. A trust can cost $1,000 or more to create if you use a lawyer. In addition, a trust is considered to be a legal entity, and depending on the type of trust could potentially be taxed annually on its income.

In addition, trustees are frequently paid to manage a trust, though that can be avoided if the trustee and beneficiary are the same person.

Or perhaps none of the advantages of having a trust are a priority for you. If you are married, most of your assets will pass automatically to your spouse, and a will, which is much less expensive than a trust, can take care of the rest.

Potential pitfalls to watch out for

If you decide to set up a trust, there are a few things you should avoid.

First, be careful who you choose as the trustee—especially if the trustee is a family member. Consider what position it may put them in with the beneficiary or beneficiaries and the rest of the family if they are responsible for fiscal decisions that affect other family members.

Second, revisit trust details periodically. Life happens, and there may be good reasons for changing the beneficiary or trustee or eliminating the trust.

Third, make sure your trust is funded, otherwise you set it up for no reason. The trust cannot operate unless it has assets. So after you establish a trust, re-title assets that you want to be part of the trust in the name of the trust. If it is not titled in the name of the trust when you die, it may have to be probated and may not be awarded to the person you intended.

A trust can benefit many families and individuals, and certainly shouldn’t be the province of the wealthy alone. If you’d like to learn more about trusts, we have another great article here.

And, remember, Tomorrow is not a law firm and we do not provide legal advice. When in doubt, talk to a licensed attorney in your area.