In working with many clients, I often get questions that are a little out of the realm of budgets and financial portfolios. One of these questions pertains to trusts. While it is not directly a financial question in terms of investing or budgeting, it does deal indirectly with money and assets, yet is one that is often overlooked. It is in some ways like wills. Some people, while verbalizing that wills are necessary, still refuse to draw up a will.
Why? And how does that turn out when the inevitable happens?
I’ll save this topic for another blog. Trusts are also somewhat of an enigma which often tends to scare people into inactivity, causing even more problems in the long run. So let’s dispel some of the myths about trusts and delve into the eight main reasons why they are beneficial and even necessary.
Asset Management and Control: People set up trusts in order to transfer assets to a trustee or trustees. Trusts can be managed by individuals and/or corporations including lawyers. Establishing trusts can also be a way not only to manage and control one’s assets but is also a way for the grantor to continue to increase wealth while establishing the control of what will happen to their assets.
Privacy: There are times when it is best when the conditions of a trust or the exchange of assets are private rather than public. Information in a will becomes public record after the will is filed with the probate court which is the case for most estates since the assets in the will are eventually distributed. This is not the case with a living trust called an inter vivos trust or a trust between the living. In inter vivos trusts, the conditions and assets are kept private.
Tax Control: For income purposes, trusts and inheritances are considered as gifts, so trusts and the distribution of assets from trusts to the beneficiaries are not taxed. That is good news. These laws began changing for the masses in the 1990s, and now, as of 2022, the lifetime gift exclusion is $12.06 million. There are also amounts for married couples that are double that at $24.12 million. Trusts can save both the grantor and the grantor’s family money in regards to current income taxes and transfer taxes. The IRS does not tax the beneficiary in most cases since the money in the trust has already been taxed.
Disposition Control: The grantor of a trust at times may wish to put certain restrictions on the disposition of assets. There are a variety of reasons such as ensuring that the beneficiaries do not act irresponsibly with the assets allocated to them. Trusts allow the grantor to do this. So, for example, if the grantor does not want a minor to receive assets or wants to put restrictions on when the assets and how the assets will be disbursed, it is possible to set that up in the trust. This allows the grantor control over the disposition of the trust, thus enabling the grantor an alternative to an outright asset transfer.
Protection of Trust Assets: In trusts, the assets are protected, thus insulating the monies and properties from claims that could be associated with them by creditors or debts. This is assurance to the grantor that the assets will be there for the beneficiaries of the trust.
Distribution Flexibility: Trusts allow for flexibility in the way the assets are distributed. This enables the grantor of the trust to provide accordingly and also to allow for changes in financial status or life changes. An example of this is when the trust is first established, the grantor may envision that the assets be divided equally between beneficiaries. However, fast forward into the future, and, now, not all three beneficiaries have the same financial needs. The grantor of the trust is able to write the trust in such a way that accounts for these situations which can be a relief to the grantor.
Avoidance of Conservatorship: In the event of a family member who is physically, mentally, or emotionally unable to provide financial care for himself or herself, a trust is a wonderful way to deliver the necessary financial means for long-term care. Often in these situations, by law, a conservatorship is named who is charged with managing the assets. There are times, however, when the trust is written, leaving the assets with a trustee who is entrusted with managing the money for the person who is not able to financially care for himself or herself which then bypasses the conservatorship. But, this is dependent on the situation and the way in which the trust is established, so it is necessary to check with a professional when in this situation. Nonetheless, the trust provides the necessary money to financially provide for the individual who needs long-term care.
Transferring Assets Outside of Probate: After death, if the deceased has assets, regardless of a will, the will and/or estate must be authenticated which is called probate. Often an executor or executrix is already named in a will, so the named person has the responsibility of administering the process of probate. The process can be drawn out and can be costly, so it is incumbent to avoid probate as much as possible. Trusts, especially those with revocable living trusts, avoid probate because they are not set up as part of the deceased’s will. Therefore, the disposition of assets is streamlined and avoids costly fees that are often associated with wills.
Let’s face it. We all work hard for our money and don’t want to waste it. Most of us want to leave something to our families upon our deaths. Trusts allow us to do so in ways that avoid many headaches, taxes, fees, and undue stress. They are certainly something to be aware of, especially as we accumulate wealth. For help discerning if a trust is right for you, contact me so we can dissect trusts on a deeper level. For all of your financial needs, contact me and follow me on Budgetdog. My mission is to help people make the most of their financial situation.