What Is a Trust? How They Work & Who Needs One

What Is a Trust? How They Work & Who Needs One

Category: Estates | Inheritances

A trust ensures your assets go to the right beneficiaries. Trusts offer tax benefits for those subject to estate taxes, which helps maximize wealth for future generations.

What is a trust?

A trust is a legal arrangement intended to ensure a person’s assets eventually go to specific beneficiaries. The person creating the trust puts assets in the name of the trust and authorizes a third party to administer those assets for the trust creator and the beneficiaries. A well-designed trust can help save time, paperwork and other headaches when settling an estate. In some cases, trusts can also help reduce the amount of estate taxes beneficiaries have to pay when they inherit assets.

Who needs a trust?

Trusts are often wrongly associated with folks who might have a higher net worth, but trusts aren’t just for rich people. They can be an important part of estate planning and can provide peace of mind by ensuring your assets will go to the right people.

This article is a simplified overview of what trusts are, how they work, and some of the basic differences between types of trusts (living, revocable, irrevocable and others). Trusts can be very complicated, and can quickly become overwhelming if you haven’t dealt with them before. If you need help understanding the intricate details of a specific trust, be sure to consult with an experienced financial advisor.

Who is involved in a trust?

Trusts have three main players:

  • Grantor: The person who creates the trust and puts assets in it.
  • Beneficiary: A person who eventually receives some or all of the assets in the trust.
  • Trustee: The organization or person who administers the trust.

The main purpose of a trust is to transfer assets from one person to another. Trusts can hold different kinds of assets. Investment accounts, houses and cars are examples.

One advantage of a trust is that it usually avoids having your assets (and your heirs) go through probate when you die. Probate is a part of the court system tasked with deciding whether your will is valid (if you have a will) and then distributing your assets. That can take several months, and much of it is public record.

Advantages of a trust

Control: You can specify the terms of the trust, which means a trust can help you be strategic if you want to protect assets after a divorce, for example, or control when kids get your money, or control how people spend the money you leave them.

Privacy: Assets in trusts don’t have to go through probate. That process is public record, which can create drama if you’re disinheriting someone or making distributions that you don’t want to be public.

Time: Probate can take several months. Trusts can avoid probate and get assets to your heirs faster.

Potential tax savings: As we detail below, some types of trusts can lower your estate taxes. However, most people don’t have to pay estate taxes, so talk with a financial advisor before setting up a trust. There’s no reason to use a trust to avoid taxes you may not have to pay anyway.

Disadvantages of a trust

Cost: An estate attorney can do the paperwork involved in setting up a trust and transferring your assets into the trust.

Time: You’ll need to spend time dealing with paperwork. You may need to have uncomfortable conversations about who gets what.

May not be necessary for tax reasons: Some people can indeed save on estate taxes with certain trusts, but most estates aren’t subject to estate taxes in the first place.

What is a living or revocable trust?

Living trusts are also known as revocable trusts. In these trusts, you can change the beneficiaries and assets as long as you’re alive and physically and mentally able to do so. You can even name yourself as the trustee and name a co-trustee or successor trustee. That way, if you’re diagnosed with a debilitating condition, you can get things in order before you’re unable to do so, and then when the day comes, the successor trustee takes over managing the trust for you.

What is an irrevocable trust?

In an irrevocable trust, you can’t change your mind. Once you put assets in the trust and name a beneficiary, it’s permanent. (Make sure you know whether an irrevocable trust is right for you.) An advantage of irrevocable trusts is that you might be able to reduce your estate taxes — the assets in an irrevocable trust technically aren’t yours. The trust owns them.

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See the original article here: https://www.nerdwallet.com/article/investing/setting-up-a-trust

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