Set up a trust. It is a recommendation heard by many people for estate planning, asset protection, privacy of ownership and other purposes. But what is a trust and what does it do for you? Those are the questions that this article intends to answer.
What if you could control the future? Almost everyone wishes that they could see the future sometimes. How nice would it be to know that a deer was going to run across the road in front of you? How great would it be to know that shirt was going to go on clearance next week so you don’t pay full price this week?
Until the premonitions come, there are at least ways to answer some of the “what ifs” of your financial future. By establishing a trust, you can decide now exactly how your money and other assets are distributed when your child comes of age, you’re hit with debt, if you become incapacitated, or when you die.
What Is a Trust?
Investopedia describes a trust as “agreement that describes how assets will be managed and held for the benefit of another person.” The goals of those who want to set up a trust may vary. But some of the reasons can be asset protection, avoiding probate, providing financial support, gaining privacy advantages, and minimizing taxes.
Some of the important terms associated with setting up a trust are:
- Grantor – The person that creates the trust and possess the property to be held under the trust
- Trustee – An individual or corporation that can receive the property on behalf of the beneficiary per the rules of the trust document
- Beneficiary – The person(s) benefiting from the trust
- Decedent – The person who has died, usually the grantor
- Property – The principal or asset that gets put inside a trust, usually including money, securities, real estate, jewelry, etc.
Types of Trust Funds
Although there are many different trust specialties, Everplans breaks down trusts into four categories: living, testamentary, irrevocable, and revocable.
Living and testamentary trusts are the two categories that determine when a trust becomes effective. Both kinds of trusts are set up by you, the grantor, during your lifespan. A living trust, when it is created, is immediately effective. A testamentary trust is created but not effective until after your death. This second kind of trust is often created within a will, and the person who created it is called the “testator.”
Revocable and irrevocable trusts are the categories that describe how changeable the terms of the trust are. Revocable trusts allow the grantor to retain ownership and control of the assets, but allow for change. The terms, trustees, and beneficiaries can all be altered over the life of the trust. Irrevocable trusts, on the other hand, give ownership and control of the property to the trustee. The grantor, since they no longer control the trust, cannot enact any changes on this kind of trust.
Investopedia goes on to break trusts down into two additional categories: funded and unfunded. Funded trusts have been fully or partially funded by the grantor. Unfunded, or implied, trusts are simply trust agreements. Some trusts remain unfunded until the grantor’s death, or remain unfunded.
Asset Protection Trust
Asset protection trusts can be a vital part of your entire asset protection plan. These kinds of trusts are specifically created as a shield against creditors or other persons who might have a claim on your assets. A good initial step before creating this kind of trust is to create an LLC or corporation. Asset protection trusts are always irrevocable, meaning the one who set it up cannot change it, directly. It can usually be altered with the assistance of a third party, such as a trustee. The reason for this is that if the grantor could change it directly, a judge could order the grantor to change the beneficiary of the trust to the grantor’s legal enemies.
An irrevocable asset protection trust removes the grantor’s right of ownership and places it in the trust, which its power to protect. When the trust is opened that owns a limited liability company or LLC it puts a tool in the trust that you can manage. Plus, since you do not own the LLC directly, it provides for an extra shield of protection to keep creditors at bay. Moreover, with an offshore asset protection trust, you have a trustee who can step in to protect you who is not subject to your local court orders.
Domestic or Offshore Trust?
As indicated above, an asset protection trusts can be set up in your home country or offshore. The location where you set up a trust is important, as different states and countries will have different levels of protection offered by such trusts. Within the U.S., some states may limit access to the trust assets or allow exceptions for child support or alimony. Many states also have laws preventing fraudulent transfers.
Offshore trusts are trusts set up under a foreign jurisdiction. Foreign trusts offer stronger asset protection because the offshore trustee is outside the reach of your local courts. Licensed professionals such as physicians, stockbrokers, other types of business owners and more often use these offshore trusts as insurance against future lawsuits. A trust can be set up in the middle of an ongoing legal dispute, but should be set up beforehand. Doing so during a legal battle as that can be viewed as a fraudulent conveyance of funds. Keep in mind that fraudulent conveyance is a civil matter, not a criminal one. Nonetheless, it is best to set up the trust before you need it. Offshore trusts can be set up without ever leaving home.
Revocable Living Trusts
Setting up a living trust that is revocable is an important aspect of estate planning. Although testamentary trusts and wills can be viable options, AARP explains that living revocable trusts have additional before- and after-death advantages.
A main benefit of setting up a revocable living trust is that it eliminates the need for probate courts getting in between your assets and your beneficiaries. This trust can serve as a substitute for a power of attorney. The trust can be written so that the assets pass on to your beneficiaries immediately upon your death, or they can be portioned out over time in various amounts. The “revocable” part of the trust means that you can change your beneficiaries and the stipulations of your trust as time goes on and your desires change.
Largely, a revocable living trust can resolve some of the common issues with inheritance. However, if you cut out or exclude someone from the living trust as a beneficiary, he or she can still challenge the trust.
You might hear the term “trust fund baby” and immediately picture the child of a wealthy family who walks around like he or she is entitled to everything. While the stereotype might hold up for some people, recipients of a trust fund don’t have to be wealthy or even have easy access to their trusts.
If you want to set up a trust and don’t have several million dollars lying around, you do have options. One of those options is a kiss trust. Although kiss trusts can be set up for anyone, The Balance suggests that they are a good choice for your children and grandchildren. Like a traditional trust, you will set up the regulations that allow the recipient of the trust to extract their money – like to pay for college or only acquire at a certain age.
Unlike a traditional trust, kiss trusts don’t have the heavy legal fees associated with an attorney preparing all your documents. These living, irrevocable trusts can be started for anyone with a minimum investment of $1,000, or $50 if you commit to monthly contributions. The cost is generally about $200 for the first trust, a sum that includes the preparation of all the legal documents necessary. One estimate is that if you set up an account for $1,000 and continue to contribute $100 per year to that account for 18 years, the trust could be worth as much as $315,000.
A land trust is used to hold real estate. This can be used to own a personal residence, rental properties, commercial real estate, raw land or other types of real property. Instead of leaving your name exposed to contingent fee attorneys searching the public records for an easy buck, many people choose to hold their properties privately using this type of legal tool. The title to the house is in the trust/trustee name and not your name, personally. The trustee can be, for example, a corporation or LLC that you own privately or a trusted friend or relative. The trustee can be shielded from personal liability for property-related legal actions. Land trusts have been used in all 50 US states.
Title Holding Trusts
Title holding trusts are, as the name indicates, to hold titles to property. They are most commonly used to own personal property, such as automobiles. It is another tool used to keep your ownership of vehicles private and out of the public records. The DMV record is another place that attorneys search to look for assets. If there is not a public record indicating that you own an automobile, it decreases the odds of looking like a man or woman of means that an attorney can use to put food on his or her own table.
How to Set Up a Trust
The variables for how to set up a trust or a trust fund bank account depend on the location, type, and goals of your trust. The process can be complicated, so it’s important to hire a legal professional to help you navigate the legalese surrounding the laws and provisions for your trust. SF Gate breaks the process down into 5 steps:
- Choose your trust type
- Appoint a trustee or group of trustees
- List the assets used to fund the trust
- Have an attorney draw up the trust document and transfer the assets to the trust
- Takes the agreement to the bank that will house the trust
Most of the cost of setting up a trust comes from the fees associated with the professional who sets it up. An experienced professional can prepare all the legal documents for your trust, so you as the grantor pay for their time. Estimates of costs for setting up living trusts, are, for example, $1,500 to $3,500 for individuals and $1,900 to $4,500 for married couples. For more information, there are numbers and a form on this page.
Maintaining Your Trust
In addition to any further contributions or stipulations of your trust, trust maintenance includes taxes. Trusts are taxable entities, and funds not distributed from a trust are taxed. The Special Needs Alliance explains part of how tax is decided and who pays it.
When a revocable trust gains income, that income is taxable to the trust’s creator. Since the grantor retains control of the property involved in the trust, it must be reported as part of their personal income. There is no tax return for the trust itself.
Irrevocable trusts, on the other hand, have their own tax identification number, and they can either be considered grantor trusts or non-grantor trusts. Grantor trusts act similarly to a revocable trust, where the income is part of the personal tax return of the grantor. With a non-grantor trust, the trust receives a deduction and all or part of the trust is taxed to the trust’s beneficiary. While this may seem initially bad, the benefit can lie in the lower tax bracket of the beneficiary or certain exemptions applied to their taxes.
Set Up a Trust Conclusion
There might not be a way to know exactly what’s going to happen to you and your money in the future, but a trust can ensure that your assets are used in the way you want them to be. Race cars, dump trucks and SUVs are all vehicles but are used for distinctly different purposes. Similarly, there are many different types of trusts depending on the desired result. What kind of trust do you need? It depends in what you would like it to accomplish. Let us help you protect your future. There are numbers and an inquiry form on this page to do just that.