Introduction

The belief that creating a trust only benefits the wealthy is incorrect. Today, more middle class people are creating trusts for a variety of reasons. A trust is simply an estate planning tool that allows a person to manage and distribute property in a very specific manner, either while living or after death. A trust can replace or supplement a will. Establishing a trust which includes a significant amount of property can become complicated and require legal and financial assistance, but the basics of setting up a simple trust can often be completed quickly and inexpensively.

The Required Contents of a Trust Document

The basics of a trust simply require the names of the trustor, the trustee and the beneficiary. It must also include a list of property to be included in the trust and directions for how and when trust funds or property will be distributed.

A trust requires a trustor or grantor, the person placing property in the trust, and a trustee, the person or entity who will manage the trust. A trustee may be a bank, attorney or a trusted friend. A trustor may also name him or herself as the trustee. Typically, a successor trustee is designated as well. That person will take over management of the trust should the first trustee become unable to do so. Who you name as the trustee is an important decision. That person has a fiduciary duty to responsibly manage the assets of the trust and ensure funds are distributed in accordance with the trust’s terms. Trustees are usually compensated for time spent managing the trust. The trust document must name one or more beneficiaries, or the persons or organizations that will receive property or payments from the trust.

The trust document must contain a list of property which is to be included. Property may consist of real estate, stocks, bonds, vehicles and personal possessions. Smaller personal property, such as furniture, antiques and collectibles, can be itemized on an attached list. Real or personal property, which carries a title, must be formally re-registered in the trust’s name. Once transferred, the trust becomes the legal owner of the property. Property such as IRAs, annuities or insurance policies which name a beneficiary does not need to be included in a trust. Should you want funds from those items to be included in the trust, the trust must be designated as the beneficiary.

The trust document should include specific directions regarding conditions under which property may be distributed to a specific beneficiary. For example, the trust may state that a beneficiary is to receive $10,000 annually to be used for education purposes only. Provisions might limit distribution of funds to purchase of a first home or to cover future healthcare expenses. Similarly, the document should state what events will trigger termination of the trust and final distribution of any remaining assets within it.

When Can a Trust be Established?

A trust can be established either while the trustor is alive or upon a trustor’s death, with details for the trust’s establishment included in a will. A trust may be revocable allowing the trustor to change the terms of and property within the trust at any time, or it may be made irrevocable. An irrevocable trust, once established, prohibits the trustor from changing the terms or having any interest in the property transferred into the trust.

The Benefits of a Trust

Creating a trust provides a variety of benefits. It can create tax advantages for the trustor and beneficiary. For example, when property is transferred into an irrevocable trust, the trustor no longer has any tax obligation for that property. The property is not considered part of trustor’s net worth and may result in moving him or her into a lower tax bracket.

A trust often simplifies distribution of property following death of the trustor. When a person dies, property is typically distributed based on that person’s will. This often requires a probate procedure to be initiated in court, which can be time consuming, costly and inefficient. If a trust is established after a person’s death based on provisions in a will, property designated for the trust will have to go through probate. However, property placed into a trust prior to the trustor’s death is not subject to probate. The trustee has the power to distribute the property without involvement of a court. Only the property the trustor did not include in the trust is subject to probate. If the trustor planned ahead and named beneficiaries for insurance policies, created joint bank accounts and gave others survivorship rights to property, there may be no reason to initiate any probate proceeding.

Establishing a trust ensures privacy. Unlike a will which is considered a public document and must often be filed in court as part of a probate proceeding, a trust is a private document. Property in the trust can be liquidated and distributed without public scrutiny.

A trust allows a person to maintain control of property distribution even after death. A person can specify when and how a beneficiary will receive trust funds. If a trustor feels a beneficiary lacks responsibility to handle receipt of a lump sum, he or she can direct that a specific amount be provided annually for general or specific purposes or that funds only be distributed when the beneficiary reaches a certain age. Trusts for future generations of children can also be established, ensuring a lasting legacy.

Concluding Remarks

Prior to creating a trust you should determine your motives and goals for doing so. A variety of specific trust types exist for charitable giving, minimizing taxes, covering education costs or other specific objectives.  Once you have determined the purpose for creating a trust, you will be able to craft a well-structured document allowing your assets to benefit others for years or generations to come.

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