If you decide to establish a trust fund, consider your goals before you begin. Doing so will help you determine whether you need a trust and, if so, what type is most appropriate. Trust funds and wills are each estate planning tools and often work together to describe how you want your assets distributed after you die. Trusts can also contribute to tax management strategies and disseminate assets and income while you are still living.
Should I use an estate planning attorney?
You will likely need an estate planning attorney and may also involve your other financial professionals like an accountant, broker, and financial advisor. Estate planning is a legal specialty, and using an attorney may be helpful, depending on the complexity of your financial situation and plans. While a will takes effect when the testator (the person who writes the will) dies, a trust may be effective while you are alive.
Can a trust help me manage taxes?
The federal government imposes estate taxes when a taxpayer dies, and some states have estate or inheritance taxes. Federal estate taxes only apply to estates valued at more than $12 million, so most people don’t have to consider this levy. In addition, estate transfers to spouses are not affected, no matter how large. However, establishing a trust may allow you to mitigate the imposition of income taxes in some cases, so trusts are considered helpful for estate planning functions.
What kind of trust do I need?
The type of trust you choose depends on your financial needs and goals. A financial advisor can help you evaluate your options.
A revocable trust is one in which the assets remain the grantor's property, and the grantor and trust are the same entity for tax purposes. The grantor can change or revoke the trust at their discretion. If the trust is irrevocable, the grantor can only change the terms with the beneficiaries' consent. Since, in this case, the trustor relinquishes the rights to the assets in the trust, the trust has its own taxpayer identification number and files taxes separately.
With either type, one advantage is that the beneficiaries can typically avoid the probate process, and the heirs can usually gain access to their inheritance more quickly. However, an irrevocable trust shields assets from creditors, while a revocable trust does not.
What does the trustee do?
A trustee should be a neutral third party who administers the trust on behalf of the beneficiaries. They have a fiduciary duty to act in the heirs’ best interests, although sometimes the trustee is also a beneficiary. The trustee’s responsibilities depend on the trust’s structure and nature. Their job may include the following:
- Protecting the assets from claims
- Managing investments
- Paying bills and taxes
- Distributing income or principal to the beneficiaries
- Keeping records
The trustee is obligated to follow the trustor’s instructions.
Is a trust a legal entity?
Yes, trusts are legal entities, which is one good reason to use the services of an estate planning attorney when you are creating your trust. The attorney can advise you regarding the type of trust (simple or complex, charitable, special intention, or others) and create the trust instrument. Once you have completed these steps, you can open a trust fund bank account and transfer the intended assets to the account.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
