Do You Need a Trust

What, exactly, are trusts? How can they help you? And, most importantly…do you need one?

As an Elder Law attorney, I get asked these questions every day. So here’s a quick guide to help you decide if we should talk about trusts. First, a bit of a primer…

The person who creates the trust (you) is called the grantor. You write the rules…the how’s, why’s, who’s, when’s, etc. If the trust is revocable, you can change it if you decide to. If it’s irrevocable, you’ll have to live with it. But it’s not quite that black-and-white. Each type of trust has its own advantages and disadvantages. And the type you pick should depend on your own personal situation and desires.

When creating the trust, you need to appoint a trustee. He/she will be the person responsible for ensuring that your wishes are followed. (Some people appoint themselves as trustee…which tends to work better if you’re still alive!)

After you create the trust, you (or someone else) put some money into it. The trustee then invests the money in accordance with the rules of the trust. Each trust has three separate aspects: The principal (the money it was given). The interest and dividends earned on the principal (called income). And any profits (capital gains). Your rules for the trust determine who (the “beneficiary/ies”) gets the income, capital gains and, ultimately, the principal.

There can, of course, be many beneficiaries. And the assets can be distributed in many ways. For example, you can decide to give the income to certain beneficiaries, the capital gains to others, and the original money invested (the corpus) to others.

Trusts are not necessarily a one-time thing, either. Many people have more than one. In fact, some people have five or six…for the simple reason that different trusts have different goals. In some cases, believe it or not, trusts are even created by other trusts, or by a will!

Can Trusts be a Valuable Estate Planning Tool?

Is a trust right for you? Here are some questions you should ask yourself…

• Is your net worth more than $5 million? If your answer is yes, you might consider a Bypass Trust.
• Do you have a disabled family member? If your answer is yes, you might think about a Special Needs Trust.
• Is there a possibility your heirs might blow the money you’ve left them? If yes, maybe a Spendthrift Trust.
• Do you have a lot of life insurance? If yes, consider a Life Insurance Trust.
• Are you donating a lot of money to charity after you pass on? If your answer is yes, think about the Charitable Remainder Trust.
• Do you have children and expect your spouse to remarry after you die? Then, perhaps you should investigate a Qualified Terminal Interest Property (QTIP) Trust.
• Do you want to ensure that your assets are used for you, even if you’re not able to manage them anymore? Do you want to ensure that they go directly to your heirs, avoiding the costs, delay, and publicity of probate? If so…a Living Trust.
• Would you prefer that most of your assets go to your grandchildren? If yes, you should consult an Elder Law attorney about a Generation-Skipping Trust.

And, while this type of damage may not endanger your life, it can sure endanger your savings, and the assets you plan to leave your heirs. And it can sure endanger your legacy.

Key Terms in the Trust Game

If you’re thinking about trusts, here’s a Glossary of Terms that will be helpful…

BYPASS TRUSTS – Also sometimes referred to as the credit shelter trust, marital trust, or family trust, this vehicle is designed to help married couples avoid estate taxes. A Bypass Trust can increase the amount of money each spouse is allowed to pass on without these taxes.

SPECIAL NEEDS TRUSTS – Provides financial support for a disabled person who can’t earn enough income to support him/herself. The assets in this trust, however, cannot be used for food, clothing or housing.

SPENDTHRIFT TRUSTS – Rather than leaving money to someone in whose judgment you don’t feel confident, you can put it into a trust. The heir would get the assets later on, perhaps at a certain age, in an allowance, or as needed for specific expenses.

LIFE INSURANCE TRUSTS – If you’re worth a lot, life insurance may not be appropriate, because it’s subject to estate taxes. Instead, you might put your insurance policy into a trust, which would be your beneficiary, and your heirs would be the beneficiaries of the trust. The trust can distribute to your heirs at a measured pace.

CHARITABLE REMAINDER TRUSTS – If you’re leaving something to charity, you can establish a CRT and get a tax deduction right now. You’re the beneficiary (giving yourself an annual income), and your charity gets what’s left (tax-free) after your death.

QTIP TRUSTS – If your widow remarries and later passes on – and you have children – they could get nothing. With a Qualified Terminal Interest Property Trust, though, your inheritance is left to the trust, rather than your spouse. He/she receives income from it. But when he/she dies, your children get remaining assets.

LIVING TRUSTS – Eliminates the need for probate. And ensures your assets will be used for your benefit if you become disabled.

GENERATION SKIPPING TRUSTS – This can preserve substantial assets for several generations while avoiding income and estate taxes. And assets are also protected from creditors.

Bottom Line? If you’re thinking about trusts, think about consulting an Elder Law attorney. You can’t do this on your own.