A Super Fast Explanation of a Trust
Think of a trust as a huge bank vault where you can park all of your money and assets. You can put your house into the vault, as well as your investment portfolio, business interests, your classic cars, even your jewelry. The trust is controlled by a “trustee.” A trustee can be one of your adult children (though this may cause family squabbling), a sibling, a good friend, or a professional whom you pay to oversee the trust. The trustee protects and actively manages the funds in the trust according to your wishes. The trustee can also make distributions to your named “beneficiaries,” which can be your children, grandchildren, a charity you support, or anyone else you name.
Why exactly is a trust a good idea for your wealth? Here are five important reasons:
- Keeps Your Estate Out of Probate
When you die, your entire estate will have to go through “probate,” a long, arduous, and expensive process, whereby the court system determines how to divvy up your property. Nothing brings out family animosity and frustration like probate. Most types of trusts can neatly avoid probate, allowing your trustee to distribute your assets to your beneficiaries much more quickly.
- Tax Avoidance
Certain types of irrevocable trusts can help you avoid expensive estate taxes, which can take a big chunk out of the legacy you want to leave your children if your estate is worth enough money. If you’d rather leave your money to your children instead of Uncle Sam, a trust can help with that.
- You Maintain Control
One of the biggest benefits of a trust is that it allows you to control exactly how you want your assets distributed. For example, let’s say that Jane simply hands her entire estate to her son Bill after she dies. Bill is not the most conscientious person in the world. In fact, he decides to go on a spending spree in Las Vegas and burns through everything Jane spent her whole life saving. What a bummer!
If Jane had put her estate into a trust, she could have instructed her trustee to make monthly or quarterly distributions to Bill or only to distribute funds for certain expenses or when certain requirements have been met. (For example, when Bill graduates from college or turns 25.) (Jane really should have taught Bill about the value of saving and investing when he was a kid.)
If your estate goes through probate, it becomes a matter of public record. Everyone can see what you owned and how much you owed. A trust keeps your financial affairs private, as they should be.
Your beneficiaries do not own the assets in your trust until they are distributed. The trust is its own entity. That means that if your beneficiary should run into financial trouble, the money in the trust is safe. Let’s say that Bill has more problems than just a tendency to hit the casinos too hard. A year after Jane dies and Bill inherits her estate, he is sued by his business partner. That business partner could try to go after all of Bill’s finances, including what he inherited from Jane. The same thing could happen if Bill gets divorced or files for bankruptcy. By keeping your money in a trust, your beneficiary’s creditors can’t reach it.
A trust is not right for everyone. It can cost several thousands of dollars to create and even more if you hire a professional trustee. If you only have $10,000 to leave behind, then you could end up spending most of it just to create the trust itself. Before you make any big decisions, sit down with an attorney that specializes in estate planning and/or a financial advisor to create a personalized plan just for you. It’s never too early to start working on your estate plan!
Check out more great articles on estate and retirement planning in our retirement article archive for women. And, if you want to make sure you have something to leave your children, consider starting a Money Club in your area.