Most of us realize that in the event of a lawsuit or death, that it is unsafe to have a big pile of cash laying around in a bank account in our own names. It’s not a good way to protect and distribute the wealth we’ve earned. But with so many financial options out there, where do we even start? One of your options is setting up a trust or series of trusts. A trust agreement can be an effective method of preserving your wealth now and for your future and for generations to come.
Definition of a Trust
What is a trust fund and how does it work? A trust is “a legal entity that holds property for the benefit of another person, group, or organization,” according to the publication The Balance. The word “fund” in the term “trust fund” refers to a sum of money held by or made available to the trust. Regardless of type or provisions, all trusts have three things: a grantor, a beneficiary, and a trustee. The grantor is the person who sets up the trust agreement, giving the trust its property and deciding the terms. The beneficiary is the intended manager of the assets in the trust. They can only access the trust as set out by the grantor. The trustee is responsible for overseeing the management of the trust. It can be an individual, institution, or group of advisors.
To be upfront with you, this organization does establish all of the different types of trusts mentioned here. If this is what you need, there is a number and a form on this page to get some extra help or to move forward on getting the right kind of trust established.
There are several types of trusts designed to fit the individual needs of the grantor and beneficiary. CNN says that there are two basic kinds of trusts: living and testamentary. A living trust is set up during a person’s lifetime, and takes effect during it. A testamentary trust only goes into effect after the person’s death. Beyond these qualifications, trust types break down into revocable and irrevocable. A revocable trust allows the grantor to retain control of all assets in the trust, allowing the ability to revoke or change the terms of the trust at any time. Irrevocable trusts, however, are no longer held directly by the grantor. Changes to an irrevocable trust usually can’t be made without the beneficiary’s consent. A big benefit is that appreciated assets within the trust aren’t typically subject to estate taxes. This depends on how it was established.
Once a grantor has chosen his or her trust type, transferred the assets into it, and established the terms, the trust is active.
Managing Your Estate
Everyone has an estate – from millionaires in mansions to a family of four struggling to make ends meet. Your estate encompasses everything you own. Having an estate plan in place means that your assets and property go directly where you want them to after you die. Generally, you have two main options for your estate plan: a living trust and a will. But what’s the difference?
A will is a written document that indicates how your property will be distributed after your death. It is revocable and can be amended anytime during your lifetime. However, a drawback to a will is that when it’s enacted, everything must go through probate court. A judge must make a ruling before the assets in your estate can get to your friends and loved ones. This is the case whether or not you have a will; your estate still goes through probate. In that case, assets are distributed according to state statutes. Regardless, probate can be a very expensive and time-consuming process. The deceased is not around to fight back, so, in many cases estates are depleted by lawyer fees.
A living trust, on the other hand, provides property and estate management. It not only goes into effect after your death, but can start managing your assets right away. The grantor (the one who set up the trust) is often the initial trustee (who manages the trust) and beneficiary (who receives its benefits). Living trusts are usually revocable and become irrevocable after death. At that time, a successor trustee steps in and new people or entities typically become beneficiaries. Most often the beneficiaries receive trust assets under the terms of the trust. They also avoid extra expenses and the publicity of probate court. The successor trustee that you appoint can be in charge of the family trust whenever you want them to. Examples of when this would kick in are upon death or in the case of a mental or physical disability.
Setting up a living trust may be one of the best ways to prepare for your future, and the future of your loved ones. There are several other reasons to set up a trust, including the following:
- Caring for minor children – Trusts can specify when the child will have access to the assets
- Caring for dependents with special needs – Trusts allow more flexibility than a will in how those heirs can access the inherited property. This is because you can designate dates, amounts, exceptions, etc.
- Lowering estate tax – If your estate will be subject to tax, setting up a family trust with tax provisions helps avoid some of it
- Privacy – Wills become public record after your death, but a trust does not
Asset Protection Trust
If one of your main concerns is retaining the assets you have and protecting them from creditors, it’s a good idea to set up an asset protection trust. Attorney Barry S Engel states that both foreign and domestic trusts can protect your money from future legal challenges, especially if you have amassed a sizeable amount of wealth.
An asset protection trust can be a big part of your overall asset protection plan. This type of trust is developed to protect your income and future inheritance from seizure by creditors. Part of the way the trust does this is by putting an independent trustee between you and your creditors. How does it work? Well, the more removed you are from your asset, the greater protection it has. If you have full control, the judge could order you to use that control to turn the funds over to your opponent. With a trustee in the midst, that can put you in a position of strength. This is especially the case when the trustee is located abroad, outside of the judge’s jurisdiction.
Setting up an LLC and owning the LLC inside the trust adds an additional layer of security and convenience. Depending on how you set up the trust and who the designated grantor and beneficiary are, you can still have access to that money. You can be the manager of the company signatory on the LLC bank account. You have a trigger clause in the trust. That clause says that the trustee steps in when you could be court-ordered to turn over the funds.
Foreign and Domestic
There are both domestic and foreign options for an asset protection trust, both of which are within your legal rights to open. Domestic trusts in states, such as Nevada, Alaska or Delaware, are may sometimes be cheaper to set up, but foreign trusts have been shown to have greater overall protection. An important thing to note with this kind of trust is that it works best if it is place before a legal dispute, like a lawsuit or divorce, arises. Creating a trust in the middle of legal problems can be seen by the courts as an attempt to evade creditors, leaving your assets more vulnerable than if you had set it up before. There are offshore trusts that will work effectively if set up after you have been sued such as a Cook Islands Trust or Nevis Trust. But it is always best to pre-plan.
Trust Fund, Baby!
Often, when people hear “trust fund” they immediately pair it with the word “baby”. When associated with a person, it’s not exactly a good thing. The image conjured up is of a spoiled kid who has life handed to them on a silver plate – the result of benefiting from a trust fund their parents set up for them.
Like any stereotype, there are people that fit this image of a trust fund baby perfectly – but it’s still a stereotype. As The Motley Fool points out, being the beneficiary of a trust fund can be the start of a of a satisfying and productive life. Setting up a trust fund for your child gives them financial security and allows them to pursue careers that aren’t dependent on bringing home a big paycheck. As the grantor of such an account, you can add stipulations to help your child manage their money, like distributing it in chunks every year or every few years. You can add requirements that they must complete college first or hold a steady job.
But I’m Not Ultra-Wealthy!
Like the “trust fund baby,” one of the common barriers people to set up a trust is that people think trusts are only accessible to the rich. This too isn’t entirely true. While setting up a trust isn’t free, the variety of trusts available leave financial options available for most people.
One option for families on a budget is a kiss trust, according to Investopedia. Kiss trusts are inexpensive to set up and don’t require a high initial deposit. They are irrevocable like a traditional trust fund, and you can pay into them with one lump sum or a series of installments. Once deposited into the trust, that money is neither yours or the beneficiaries, so the funds inside the trust won’t be detrimental to the beneficiary in qualifying for things like needs-based financial aid.
Setting Up a Trust
The cost of setting up a trust varies depending on which trust you choose. CostHelper.com says that a basic trust, using an attorney, starts around $900-$1,5000. If the trust needs a bit more evaluation and planning, the initial bill can run around $1,500-$3,500. Use the number on this page to get additional support. Beyond these legal fees and/or document preparation fees, additional fees can arise from filing fees that transfer property deeds, car registrations, or other assets into the trust. Also, the trustee is entitled to payment for managing the trust unless they choose to waive payment.
How to Start
Once you’ve talked with a professional about your options and decided which trust is right for you, it’s time to learn how to set up a trust fund bank account. SF Gate says that the most important place to begin is by establishing the details. Who are the beneficiaries and trustees? Will your trust be revocable or irrevocable? What powers will the trustees have, and how will the beneficiaries be able to access the property of the trust?
Next, figure out which assets will be used to fund the trust, whether they are cash or property assets. A trust is no more than a legal agreement until it is funded. Meet with an attorney to draw up the details of the trust document and check that the laws of your state are being followed. Some states will require additional documentation for a trust, so be sure to ask your financial advisor about that. Finally, take the agreement to the bank chosen to hold the trust fund account and open the trust.
To review, revocable living trust is a legal instrument that includes instructions as to what will happen to assets upon the grantor’s death. As indicated, it is similar to a will in this regard, however unlike a will, a living trust avoids the lengthy probate process and expensive fees at death. In addition, it prevents the court from controlling your assets if you become incapacitated. It also gives the settlor (not the courts) control of the assets left to others, such as minor children or grandchildren.
Trustees of living trusts control the assets encumbered and can continue to buy, sell, mortgage, etc. just like before. Living Trusts can be canceled at any time and does not, in itself, provide asset protection, however it does avoid probate and allows the settlor to stay in control. There are a few tricks that will enable a living trust to provide some semblance of asset protection, however there are stronger options available for personal asset protection.
An asset protection trust is irrevocable, so cannot be directly changed by the one who set it up. As such, this limits the ability of the court from being able to order the grantor to turn over the funds to his or her legal enemy. An independent trustee can step and provide a creditor shield. The offshore trust offers what experts have found to be the strongest protection because the trustee is not under the jurisdiction of the local court.
There are many other types of trusts such as a land trust, for owning real estate and title holding trust for owning cars. We have covered some of the most common types of trusts and the benefits that they offer over wills for estate planning. More information is available on this website and by using the inquiry form on this page.