A lot of people have the misconception that trust funds are only for the rich. “Trust-fund babies” are often typecasted as spoiled, over-privileged young adults who rely on their parents’ wallets.
However, these stereotypes are likely not the norm. At its core, a trust fund is a vehicle for the transfer of assets. It’s a way for the grantor or the person who set up the fund to ensure that the beneficiary’s financial future is protected.
The main difference of trust funds from other estate planning tools (e.g., wills, business succession plans) is that the grantor can establish the conditions of how the assets are held, gathered, or distributed.
For example, you can set up a trust fund dedicated to your child’s schooling. If the beneficiary is a minor, the trustee (i.e., bank or institution who manages the fund) will oversee the assets, so you don’t have to worry about irresponsible spending.
As such, your family will benefit from a trust fund even if your net worth doesn’t amount to millions. An estate planning attorney typically guides you in setting up the trust, but a general practice law firm can also be helpful since trusts can touch on different branches of law.
Below are three reasons you should set up a trust.
Probate is a court-supervised process where a deceased person’s assets are located and evaluated. Whether you have a will or not, probate is likely to happen. It will either authenticate your last will or distribute your estate if you fail to specify the heirs.
Probate can be extremely time-consuming and expensive. Your family will want to avoid it, especially if they have medical bills or other expenses to pay. Plus, it has the potential of violating your privacy. Any assets left in a will are listed in public records.
A trust lets your beneficiaries bypass this process, letting them access the properties you left more quickly.
Plan for incapacity or death
Planning your estate ensures that your family is cared for even when you can’t look after them anymore. If you become incapacitated or pass away unexpectedly, the trustee will know what to do, so your family won’t have to worry about paying your hospital bills, funeral expenses, costs of a long-term care facility, or whatever care you need.
If the beneficiary dies and the trust still has money, you can specify where the remaining assets will go. You can direct the remainder of the trust to your other children or the late beneficiary’s kids. Another option is to let that heir decide what happens to the remaining assets should they suddenly pass.
Reduce your taxes
Assets placed in a trust are exempted from estate taxes. Plus, once you put properties into a trust, they are no longer yours. This means you don’t have to pay income tax for the money you make from these assets. If you’re in a higher income tax bracket, setting up an irrevocable trust can help move you to a lower bracket.
You’ve worked hard your entire life to earn money and acquire assets. Even if you’re not a high net-worth individual, setting up a trust is a wise decision. It’s a way to protect your family, provide their necessities, and guarantee their comfort long after you pass on.