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PERSONAL FINANCE: You, too, can create a trust –

Most people have a visceral reaction to the notion of a “trust.” Very often the term conjures up an image of families of vast wealth supporting an entitled “trust fund baby” or creating complicated financial structures intended to avoid income and estate taxes.

Generally, the thought is that a trust is something for the super-rich (Rockefeller, Ford, Gates) to benefit charitable causes and perhaps future generations. Sometimes, indeed, this may be the case. But very often, however, trusts are an easily understood legal vehicle that are used to protect one’s assets and to assure that these assets are properly managed and ultimately distributed to intended beneficiaries according to the wishes of the person who created the trust. As one who has recommended and administered trusts throughout my career, I know that thoughtfully created and properly administered trusts can be valuable vehicles that can benefit individuals across the socioeconomic continuum.

Examples of Trusts

A list of the various types and uses of trusts is much longer than space here allows. Let me describe some situations, though, where a trust can help fulfil the intentions of the person who establishes it (the settlor):

  • A living trust can greatly facilitate the passing on of assets upon one’s death, reducing or eliminating the time-consuming and sometimes costly process known as probate. A living trust also can provide asset management by a third party at a time in life, due to age or illness, when one cannot effectively manage his or her own assets;
  • Asset protection trusts, self-explanatory, are especially useful for those in high-liability professions such as medicine.
  • A marital trust (you may have heard the term “QTIP”) is especially useful when there are children from previous marriages. Upon one’s death a marital trust can provide income to the surviving spouse, while assuring that upon his or her passing, the remaining assets are distributed to the settlor’s children;
  • A Special Needs Trust (SNT) may be used to set aside funds for a disabled child, without impacting the child’s ability to receive governmental support;
  • A Medicaid trust may protect assets that otherwise would be exhausted by assisted living or nursing home expenses;
  • A Spendthrift trust can protect immature or irresponsible children from themselves;
  • And there are many other gifting and estate uses for trusts that indeed can save taxes, and can elegantly address complicated family situations – such as the ages when children receive their inheritances.

Trust Basics

A trust is a legal entity that is created by law. Here are some essential elements of how trusts are created and how they work.

Once created, a trust is governed by its trust document, essentially a blueprint for its operations that defines the trust’s purpose, the various parties to the trust, and its operations.

The person establishing the trust, the “settlor,” can create it while alive (inter-vivos trust) or have the trust be created upon death through his or her will (testamentary trust). A trust can be revocable (changed by the settlor at any time) or irrevocable (cannot be changed once created). Once a trust is created it can be currently funded, or left unfunded until a later time. For example, a trust initially can be created to hold an insurance policy, which will receive the insurance proceeds upon the settlor’s death.

A trust is created for the benefit of one or more beneficiaries. As the term “beneficiaries” implies, these are the people (or entities such as, say, charities) who will benefit from distributions from the trust.

A trust requires one or more “trustees,” the person, persons or institution (known as a corporate trustee) that accepts the transfer of assets on behalf of the trust. The trustee has the responsibility to administer the trust in accordance with the provisions of the trust document. The trustee has a fiduciary duty to the beneficiaries of the trust. That is, the trustee must always put the interests of the beneficiaries above his or her own interests.

This is a lot to absorb! The creation of a trust always requires the services of an attorney experienced in creating and working with trusts. The attorney will customize the trust document according to the wishes of the intended outcome of the settlor. Trust documents are quite exacting and its provisions must be carefully followed by the trustee. The attorney will review the provisions of the trust document with both the settlor and trustee so everyone is on the same page.

Trusts can be extremely elegant financial planning tools that can be useful in providing solutions to many of life’s financial concerns. In future columns I’ll be discussing specific types of trusts and how they may be useful to you and your family.

The author does not provide tax, legal, financial or investment advice. This material has been prepared for informational purposes only. You should consult your own tax, legal, financial and investment advisors before engaging in any transaction.