Understanding Trusts
Protect your wealth today. Maximize the legacy you leave for future generations. These are the two primary reasons for establishing a trust. Although each trust is unique, there are a few common elements and structures you should understand.
Why establish a trust?
Trusts can provide many valuable benefits to wealthy younger families including:
- Providing for family members if something should happen to you
- Dictating the distribution of your assets to specific beneficiaries
- Helping transfer highly-appreciated assets tax efficiently
- Ensuring continued care of a loved one with special needs
- Insulating family wealth from lawsuits, creditors and divorce
- Leaving a charitable legacy
How do trusts work?
A trust is a fiduciary1 relationship in which one party (the Grantor) gives a second party2 (the Trustee) the right to hold title to property or assets for the benefit of a third party (the Beneficiary).
What's in a trust?
Principal — the assets it holds like cash, stocks, bonds and real estate
Income — its earnings over time, including interest, dividends, rent and royalties
Trust types
There are a wide range of trusts, all designed for specific purposes such as removing the value of your home from your estate, passing life insurance proceeds outside of probate or protecting an inheritance for a spendthrift child. All trusts, however, fall into two broad categories — revocable and irrevocable:
- Irrevocable Trusts:
- Usually created by the grantor to benefit others, such as children / grandchildren
- Primarily used to hold lifetime gifts fr the beneficiaries and to receive assets following a grantor's death
- The grantor:
- Generally cannot change the trust in any meaningful way
- Gives up ownership and control of the trust assets (although may retain some control through the terms established in the trust document.
- Tax planning and asset protection are two reasons these trusts may stay in place for multiple generations
2. Revocable Trusts:
- Sometimes referred to as revocable living trusts
- Created by the grantor during his or her lifetime in case of incapacity and/or avoid probate when they die (reducing court costs and providing privacy).
- The grantor:
- May change the trust at any time
- May terminate the trust
- Has free access to the assets
- As a result, the don't provide any creditor protections or tax savings benefits.