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Task: An Overview Of Creating A Trust

We’re going to try and make the concept of a Trust as easy to understand as possible, but to be honest, they can be quite complicated and complex.

A Trust allows you to put a barrier between you and your assets to protect them from taxes, lawsuits, nosey people, and other things you want to avoid. It’s basically like creating a business, and can require a bank account, Employer Identification Number (EIN), filing taxes, and retitling assets. So, why would you want one?

  • To avoid probate court: Probate, which we touched on in this task, is the process when a Will is validated. It can be long and slow and a hassle for your family. If all your major assets are in a Trust, then they can pass to your heirs and beneficiaries without having to go through the courts.
  • To maintain control of assets in the event of incompetence: If you become unable to manage your assets due to a decline in health or mental fitness, the rules set forth in the Trust can keep them protected more than a typical bank or investment account.
  • To put space between you and your assets: You can create the type of Trust that takes ownership of your assets, which may allow you to qualify for Medicaid, and serve as a shield from creditors and personal lawsuits.
  • To pay Life Insurance premiums: Many people have a Life Insurance Trust to keep insurance separate from their estate because it gets taxed much differently.
  • To maintain control over assets after the original owner has died: When a significant amount of assets are involved (cash, property, valuables), Trusts can be established to maintain control of how those assets are used after death. For example, a Trust’s sole purpose could be paying college tuition for a grandchild. In this scenario, the money in the Trust can only be used to pay that tuition and can’t be used for anything else.

Now that you know what they can do, here are the four main aspects:

  • The person who creates the Trust is called the Grantor (also known as “donor,” “settlor,” or “trustor”).
  • The property or assets themselves, including money, which is held in the Trust and managed by the trustee(s) is called the Principal.
  • A Trustee is the person, people, or entity (such as a bank) that agrees to hold the principal and is responsible for managing it, filing taxes, and distributing it according to the rules of the Trust (the grantor may also be the trustee). When the person who created the Trust dies, a successor trustee is tasked with following the rules of the Trust to manage or distribute whatever was in it.
  • Finally, a Beneficiary is the person or people who ultimately receive the property or assets in the Trust.

Depending on the type of assets you’re trying to protect, you’ll have to choose between two main types of Trusts: Living or Testamentary. Here’s the difference:

Living: This becomes effective the moment it’s created. This is the one you hear about the most (with the exception of “Trust Funds”) and is usually established to avoid probate and keep your financial details private. This allows for privacy and can protect assets in the Trust from taxes and creditors. You’re basically giving up your assets to the Trust so they’re no longer yours.

Testamentary: This is created as part of a Will and only becomes effective after death. It’s primarily used to control how or when a beneficiary receives those assets. It could be that your child doesn’t receive a payout until they turn a certain age.

Once the type is established you have one more major decision to make: Should it be revocable or irrevocable.

Revocable means it can be changed at any time, but it also means the assets in the Trust are still yours. Irrevocable means you’re giving up control of those assets and they’re no longer considered yours and you no longer have control over them.

Why would you want to give up control? The main benefits are these assets are protected from lawsuits, creditors, and taxes that you’d have to pay if they were still yours. Again, think of it like a business, where you have to pay taxes on the business but they don’t come out of your personal account.

The Task

Here’s the thing about Trusts: They’re complicated. So here’s the task: Talk to a financial pro and find out if you even need a standalone Trust (some are expensive and have lots of requirements) or if a Testamentary Trust in your Will will suffice. It’s no secret that COVID-19 has thrown the world, and many people’s financial outlook, into a tailspin, but as things eventually correct you want to be prepared to protect what you have and what you hope to build for the future.

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