Setting up a trust is a suitable model for your wealth management strategy. Contrary to a popular misconception, having a third party hold your property or assets isn’t only for the super-wealthy individuals. Moreover, setting up a trust might seem costly and complex at first, but it will serve many purposes in your financial, retirement, estate, and tax planning in the long haul.
You can set up a trust for a variety of reasons and functions. Still, you have to be knowledgeable on the types of trusts, the benefits, and the process of setting up one. What’s more, setting up a trust can be tricky to navigate. Therefore, seeking a solicitor’s acumen will go a long way in ensuring you avoid costly mistakes. Even better, this post sheds insightful information to help you plan for the future.
Here is all you need to know.
A trust or trust fund is a legal agreement in which a trustor or a grantor ( individual setting up the trust ) gives another party, the trustee, the right to hold property and assets for the benefit of others, also known as beneficiaries.
There are various types of trusts, each serving different purposes depending on its foundation. Nonetheless, all trust forms begin with a trust agreement, a trustee, and at least one beneficiary. In some instances, older beneficiaries can become trustees. Also, the individual setting up the trust can be a lifetime beneficiary and a trustee simultaneously.
In sum, trusts determine how to manage and distribute an individual’s wealth while alive or after death. After death, trust assets tend to pass more seamlessly to the beneficiaries since it helps avoid taxes and the probate process. That is, your assets will be safe from creditors, and there will be less chance for the inheritance to be contested.
As assuring and lucrative as trusts might seem, they require time and money to create. Also, revoking a trust fund isn’t an easy process.
Trusts are ideal for under-age beneficiaries or individuals with mental health conditions or disabilities that might impair their ability to manage finances.
The Main Types of Trusts
There are many types of trusts, but in most cases, you will find each fits into one or more of the following classifications:
1. Testamentary Trust or Living Trust
A testamentary or a will trust is a prevalent form of trust parents set up for their young children. Briefly, it specifies how to designate your assets after your demise. As such, testamentary trusts become effective after you pass. Before modifying a testamentary trust, you have to make changes to your will. Therefore, testamentary trusts are created within wills.
The most significant importance of testamentary trusts is that they prevent your kids from having access to their inheritance before maturation or before they develop the ability to make savvy financial decisions. Also, if you have several kids, a testamentary trust offers flexibility to ensure all your properties are allocated fairly, heeding to each child’s unique needs.
A living trust or inter-vivo trust comes into effect immediately after its creation. Contrary to testamentary trusts, living trusts are set up while an individual is still alive. Grantors can access their assets after transferring them into a living trust. As such, a grantor can use and benefit during his lifetime. Also, inter-Vivo trusts include provisions for how the trustor intends their property to be managed and distributed after their demise.
The most notable merit of living trusts is that assets don’t have to go through the probate process. Also, securing a reduction in estate taxes is quite streamlined.
2. Revocable Trusts vs Irrevocable Trusts
As its name gives it away, a trustor can revoke, change or terminate a revocable trust during his lifetime. On the other hand, it’s impractical to modify an irrevocable trust after establishing one. When you set up an irrevocable trust, you transfer the ownership and control of your properties to a trustee. As such, you can’t control the assets, making it impossible to enact changes to the trust. For a revocable trust, you are still in charge of your properties in the trust. Hence, you can amend the terms of the trust fund, including the trustees and beneficiaries.
It’s possible to set a living trust as either revocable or irrevocable. On the contrary, a testamentary trust can only be irrevocable. Irrevocable trusts are more beneficial because they are unalterable. Also, the assets no longer belong to the grantor. Therefore they are not liable to estate taxes.
Revocable trusts are also desirable since they help avoid probate. However, it would be best to seek the insight of licensed trusts and estates attorneys if you are not sure of whether to set up an irrevocable or revocable trust.
Also read: Understanding Estate Planning
Reasons For Setting Up a trust
Trusts are ideal for protecting assets and directing them into the right hands, both in the present and future, especially after the grantor’s death. Other benefits of setting up a trust include:
- Trusts avoid the probate process. This results in substantial savings in time, legal fees, and paperwork.
- Trusts tend to provide tax benefits.
- Trust minimizes possible conflict and family feuds between heirs.
- Revocable trusts will come in handy when an individual becomes sick or disabled. Your trustee can make distributions, pay bills, and even file taxes on your behalf.
- Trusts ensure there is flexibility in the distribution of assets.
- Trusts offer more privacy than will since they don’t undergo probate. As such, your assets and who you leave them to are unlikely to go through public and media scrutiny.
How to Set Up a Trust
Primarily, setting up a trust involves the following steps:
- Identify the assets you intend to place in the trust. Gather all the assets and properties alongside the titles and deeds. While at it, decide on the individuals you wish to nominate as trustees, beneficiaries, and who will manage the property for your minority beneficiaries.
- Scrutinize your main objective of setting up the trust. Is it to help your younglings with their education? What type of trust do you intend to put in place? In sum, what’s the chief reason for setting up the trust?
- Consider the structure of the trust. That is, how your properties and assets will be managed and distributed.
- How do you intend on setting up the trust fund?. Is it through an online service, an estate planning attorney, or opening a trust on your own?
- Review your assets and what to transfer into the trust.
- Decide who you want to be your successor trustee. It’s vital to consider the perfect person since a successor trustee will receive the trust property after demise. Also, let the person know to make sure they are willing to be responsible.
- Prepare the trust document. Then, sign and notarize the agreement. Finally, transfer the assets into the trust.
- After making your trust effective, transfer the title of the property to yourself. This is a critical step that tends to elude most individuals. You have to hold title to trust property in your name as trustee.