| ||||||||||||
When you think about setting up a trust, you might think about the rich and famous, or about parents who want to control their kids indefinitely.
But you don’t have to be wealthy (or overly controlling) for a trust to make sense. Anyone who wants to protect their assets, preserve their financial privacy, provide for loved ones, or keep their life running smoothly in an emergency could benefit from a trust.
And, setting up a trust may be less complicated than you think. It’s really just a process of making a number of thoughtful decisions — ideally, with the help of specialized financial and legal professionals — then completing the right paperwork to formalize those decisions.
Here’s what you’ll need to think through and carry out to set up a trust.
Decide which assets to put in a trust
To begin, estate planning experts typically recommend using a trust to hold assets that can’t be transferred on death by adding a beneficiary designation to your account.
The goal is to keep your assets out of probate, where they’ll be tied up until a judge gets to your case. Also, probate records are public. Many people don’t relish the thought that anyone could go to the courthouse and find out what they owned, how much their assets were worth, and who inherited them. A trust helps retain privacy and transfers your assets with less delay.
If privacy and speed (and avoiding probate fees) are your main goals, you may think you don’t need a trust — especially if all your assets allow for transfer-on-death (TOD) designations.
Common examples include:
- Checking and savings accounts
- Certificates of deposit
- Retirement accounts
- Treasury securities
- Vehicles (subject to state laws)
- Primary residences (subject to state laws)
But there can be exceptions and cases where outright TODs aren’t ideal.
What if you have $1 million in savings that you want to leave to your kids — but not all at once? Here’s a case where you might want to put those assets in a trust even though they could be transferred with a simple beneficiary designation.
“In most states, a child or beneficiary would receive assets from the deceased at the age of majority,” said MassMutual financial professional Sam Eppy, CPFA®. Eppy is managing partner at Levanti Wealth and head of financial planning at Coastal Wealth, both in Florida.
“When speaking to clients with children or young beneficiaries, they do not want their beneficiaries to have complete control over the funds at 18 or 21,” he said.
With a trust, you can have them gradually receive assets as they get older — or under extenuating circumstances, like needing to pay medical bills, Eppy said. In other cases, the beneficiary may be a spendthrift you want to provide for while also protecting them from themselves. (See: Working with a financial professional — why not go it alone?)
Any asset you want to protect from creditors is also a good candidate for placing in a trust.
When you hear the term “creditors,” you might be thinking about the financial institutions you’d owe money to if you ever had to declare bankruptcy. But creditors can also be ex-spouses and other plaintiffs — people who might sue you.
For example, if someone got injured on your property, if you killed someone in a car accident, or if a supplier or customer sued your small business, assets held in certain types of trusts could be protected against their claims.
People also place assets in trusts to legally mitigate estate and inheritance taxes — or to prevent their heirs from having to sell their assets to pay those taxes.
For example:
- Placing an asset into an irrevocable trust can remove it from your taxable estate, if you’re willing to relinquish control of that asset.
- A trust — perhaps established with assets ahead of time or funded with proceeds from a permanent insurance policy — may also be used to provide the money heirs need to satisfy your estate tax bill. That way, they won’t have to sell the family farm, the family vacation home, or another treasured asset.
You might also want to place into a revocable trust any assets that could be used immediately or sold to cover your expenses if you became temporarily or permanently incapacitated during your lifetime. The trust structure could make it easier for someone you appoint to step in and use your money to pay your mortgage, your medical bills, your kids’ tuition, or whatever needs to be handled.
There can be many more instances and situations when a trust can be useful. But the first step is identifying the assets involved. (Learn more: 7 situations where a trust might help you)
Choose beneficiaries of your trust
Another key decision in setting up a trust is who will receive the assets you fund it with — which could happen when you die, when the beneficiary reaches a certain age, or when some other triggering event happens, depending on the type of trust. (Related: 5 mistakes to avoid when deciding who should be your beneficiary)
A trust beneficiary can be an individual, such as a spouse or child, or it can be an entity — such as a nonprofit organization. You can name one, two, or several beneficiaries. You can choose whether they’ll receive trust assets now or in the future.
Here are some examples:
- Two parents might set up a special-needs trust for their daughter who has physical and mental differences that will require a lifetime of care.
- A couple with no children might have a revocable living trust that transfers assets to their nieces and nephews when the second spouse dies.
- A family with generational wealth might have a family trust that makes discretionary distributions to responsible children and grandchildren for specific purposes such as buying a house or starting a business.
- A matriarch might set up a trust where the current beneficiary is a charity, and family members become beneficiaries later — or the other way around.
The person setting up the trust is called the grantor.
Select a trustee
Your trustee will be responsible for overseeing and administering the assets you place in your trust. Depending on the type of trust and your reason for establishing it, you might choose one of the following to act as trustee:
- Yourself
- A family member
- A friend
- Your business partner
- Your attorney
- A financial institution, also called a corporate trustee
Choosing a corporate trustee helps protect against beneficiaries outliving their trustee, Eppy said. The corporate trustee typically gets a small percentage of the trust assets as a management fee and may require a minimum of $1 million in assets.
When a corporate trustee is not desirable, grantors often choose someone in their lives whom they expect will act in the beneficiary’s best interests, Eppy said.
Whomever you choose, they’ll have a fiduciary responsibility to do what’s best for the trust’s current and future beneficiaries. The trustee is legally bound to follow the rules for managing the trust’s assets as you’ve spelled out in the trust documents. (Related: Choosing a successor trustee)
It’s a good idea to ask your desired trustee if they’re game. If you surprise them by their appointment, they may turn down the job the very moment you want them to step up.
Draw up trust documents
There are DIY services that allow you to draw up your own trust documents. But, for some people, it may be advisable to consult your financial professional about your plans or hire an experienced and reputable estate planning attorney for this task. You want to be confident that your trust documents will hold up in court and accomplish what you want them to.
After you’ve legally established your trust by signing the trust documents, you should take the crucial step of funding your trust. That means retitling your designated assets into the trust, usually by completing more paperwork. If you don’t follow through on this step during your lifetime, by using a pour-over will (a type of will set up in conjunction with a trust), any remaining assets that were not retitled during your lifetime will fund the trust upon your death.
Once your trust is completely set up, you’ll want to review it annually or whenever you experience a major life event like a birth, death, marriage, or divorce in the family. Like the other parts of your estate plan — your will, for example — a trust may need updating from time to time.
Conclusion
Having a valid will and naming beneficiaries for your accounts is a solid and commendable first step in planning your estate. But these tools may have shortcomings that could be addressed by setting up a trust.
If you think a trust could be a better way to accomplish your planning goals — or if you need help clarifying your goals — consider discussing the monetary aspects with a financial professional. Then, you can work with an attorney to carry out your strategy.
Discover more from MassMutual…
What is estate planning and who needs it?
6 ways life insurance can be used for estate planning
Anticipating an inheritance? What to really expect
_______________________