A trust can be an effective estate planning tool, but, it is not just a vehicle used by the ultra rich. There are benefits for anyone.
Picture the trust as a wagon.
It is open and easy to put stuff in and take stuff out. You hold the handle and guide the wagon. When you are unable to hold the handle either from death or disability, it is passed on to another person to guide the wagon. If you regain health, you can retake the handle.
The definition for a trust is the legal relationship created when one person (the “grantor”) places assets under the control of another person (the “trustee”) for the benefit of some other person or people (the “beneficiaries”) or for a specified purpose.
In layman’s terms, a trust is created by the grantor (that’s you). The grantor writes the rules governing how the trust is to operate, what it is to do, and how and when to do it. If the trust is revocable, you can change the rules at any time. If the trust is irrevocable, you can’t. (Each form has advantages and disadvantages, including tax implications.)
When creating the trust, you appoint a trustee, who will have the job of managing the trust and its assets. (People often appoint themselves to serve as trustee.) The trustee must follow the trust’s rules, although, some trusts let the trustee use discretion in certain matters. [source: http://www.edelmanfinancial.com/%5D
Common objectives for trusts are to:
Manage assets for your family
Control who, when & how assets are distributed,
Protect property from costly taxes and fees,
Safeguard your life care plan.
These objectives can be categorized into three general areas.
A trust allows you to give your money and property to those you care about while protecting it for them at the same time.
With a trust, you control distribution of your assets. You have the flexibility to begin property distribution before death, at death, and afterwards. In other words. you can give your beneficiaries assets when and how you choose, unlike with a will. Additionally, you, as the grantor, can also specify how the assets can be used.
Because a trust is private and will not become part of the public record, you can pass wealth efficiently and privately to your heirs. A trust will not become part of the public record unless a trustee or a beneficiary demands court approval of accounts. Probate records are always open to the public and the court will require disclosure of all assets.
Additionally, a trust allows you to manage matrimonial/relationship property If your surviving spouse remarries, you can ensure that your assets remain in your family. The trust can spell out exactly how marriage affects the inheritance of children or grandchildren from a first marriage.
Another common reason to have a trust is to ensure ongoing care and financial support for a special needs child or loved one who may not be able to manage assets on their own. Leaving them an inheritance outright could disqualify them from government benefits.
Probate is a legal process that takes place after someone dies. It includes:
proving in court that a deceased person’s will is valid (usually a routine matter)
identifying and inventorying the deceased person’s property
having the property appraised
paying debts and taxes, and
distributing the remaining property as the will (or state law, if there’s no will) directs.
Typically, probate involves paperwork and court appearances by lawyers. The lawyers and court fees are paid from estate property, which would otherwise go to the people who inherit the deceased person’s property. [source: Nolo.com]
A trust allows you to avoid probate and gain access to the assets more quickly. It typically takes 6-12 months to finalize a probated will.
Another protection benefit of a trust is reducing or eliminating estate taxes. Most of us would not be in the category of needing this benefit. Consider the IRS explanation of the estate tax. An estate tax is a tax on your right to transfer property after your death. Today, only the wealthiest 2 percent of Americans end up having to pay estate taxes: those whose taxable estates are worth $1 million dollars or more, after standard deductions are taken [source: IRS]. However, if you are a business owner, you can use trusts to save on estate taxes when passing along businesses to heirs.
There are also certain types of trusts that offer protection from creditors or income tax.
A trust can also provide for management of assets should you become incapacitated and unable to manage for yourself. Remember the wagon. Here is where someone else takes the handle. The trust ensures that a plan is in place to take care of your needs.
Some trusts can provide protection from nursing home costs. However, because Medicaid has a five year look back (meaning any gifts or transfer of assets made within five years of the date of application are subject to penalties), it is best to plan this trust well ahead of time.
In short, there are many types of trusts that accomplish different purposes. As with any legal document, it is best to seek the counsel of an attorney to ensure that your estate plan is set up to accomplish your goals.