5 Reasons Why Creating a Trust is Important to Manage Wealth

Trusts offer a way to leave a legacy, protecting assets while avoiding the costs of probate, as part of your estate planning. Probate is the method of estate administration upon the death of an individual where that individual’s estate and assets are delegated. This process can cost thousands of dollars and be time consuming. To avoid this and to ensure that your loved ones receive the maximum value from your estate and assets, you can set up a trust.

What Is Included in a Trust?

A trust can include almost anything, ranging from your real estate and life insurance settlement to cash and investments. Trusts vary in size, scope and in benefits. Different trusts have different requirements. Some trusts also have specific exemptions such as jointly owned assets that can offer survivorship rights. Others offer designated beneficiaries for assets that include retirement accounts, annuities and more. 

A trustee is the person you, as the grantor, have designated to be in charge of your estate. This individual has a fiduciary responsibility to manage your trust assets responsibly.

How Can You Avoid Probate Fees?

Trust rules vary by state. States offer different ways to avoid probate fees. For example, in some states, you can add beneficiaries to receive income from your existing bank and investment accounts by using specific forms such as payable on death (POD) or transfer on death (TOD) forms. The beneficiary just has to provide the death certificate and valid ID to access funds. Some states also allow beneficiaries to vehicles and real estate with proof of death (certificate) and a beneficiary deed. You can see what probate exemptions are available here.

5 Benefits of Creating a Trust

Trusts offer a variety of benefits including protecting your assets from lawsuits and probate fees. Here are five important benefits from having a trust.

1. Protection: You can protect your assets from lawsuits and probate fees. This is especially important for people who are in professions known for litigation such as doctors and lawyers. After a person passes away, his or her estate usually goes through probate, where the public is allowed to see the will and assets. Any creditors are paid off and if the individual has assets in multiple states, probate fees will be assessed in each state. Probate fees can range from 3% to 8% of your estate. This is in addition to estate tax and income tax that would also be imposed upon any estate.

However, if you place your assets in a trust, you can shield those assets from public scrutiny and record. These assets are also off limits from creditors and not subject to probate fees. Also, by clearly designating beneficiaries through your trust, you can prevent fighting and lawsuits between heirs. (For more, see: Establishing a Revocable Living Trust.)

2. Taxes: Different kinds of trusts offer different tax protections. For example, a life insurance trust can protect life insurance death benefits from any estate taxes. You can also set up a trust fund for a child with a tax-free gift to the maximum level. In 2016, this gift was $14,000 per donor for any recipient. To determine the best way to allocate your funds in a trust, it is advisable to talk with a trust specialist.

Revocable living trusts designate a trustee to manage and control the property of the grantor. These are popular today because they offer management and provisions like credit shelter where estate taxes can be reduced. Additional tax benefits include savings from reducing transfer taxes and the size of the estate with charitable contributions.

3. Flexibility: Trusts offer ways to provide for beneficiaries in different ways. You can put aside funds for education or medical support, or decide at what age or interval, funds can be distributed.

4. Prudent Investment Strategy: The trustee has a fiduciary responsibility to oversee the management of trust funds honestly and correctly by law through regulation such as the Uniform Prudent Investor Act. This includes keeping the cash from a trust in an interest bearing account and having regular assessment of investment, risk, return and diversification. Your trustee can be an individual or an investment firm. 

5. Legacy: Having a trust offers you a specific way to leave a legacy for the people, organizations and beliefs that you hold dear. You can designate exact amounts of contributions and any guidelines for bequeathing your assets.

Setting Up a Trust

When and if you decide to have a trust, it is advisable to meet with a qualified attorney in estate planning. Choose an estate planning attorney that has sufficient experience and works well with you to determine your needs, goals and family situation. You can work with an investment advisor regarding allocation of funds to your beneficiaries.

You will need a will to designate your heirs and to provide a power of attorney privilege to an individual you choose to make decisions regarding your finances if you are not in a position to do so (incapacitated or death). It is better to be prepared ahead of time than to leave your loved ones without a clear plan or control over assets.

You will also need to periodically revisit this plan as your goals or assets may change, as well as to check if there any changes in the law that can affect your distributions. With a trust, will and designated trustee, you can enjoy the peace of mind of good financial planning and taking proactive measures to protect your loved ones.

See how we can help with planning a trust here.

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