When we think of estate planning, the first things that generally come to mind are wills and powers of attorney. Both help us safeguard our assets and clarify how our wishes will be carried out after we’re gone. However, there’s one other powerful estate planning tool that’s easy to overlook — trust funds
. The prevailing assumption is that trust funds are reserved only for the super-rich. In real life, that stereotype is a far cry from the way trust funds actually work.
Times have changed, and middle-class families are increasingly using trust funds to maximize their estate plans. Trusts, which create a legacy plan for divvying up specific assets, not only help your loved ones avoid the headache of probate court after your death, they also decrease your tax burden in life.
The following strategies can be leveraged while incorporating a trust fund into your financial plan. Figure out the right type of trust for your needs.
There are two basic options when setting up a trust fund. The right one for you depends on your lifestyle and individual needs. The first option, called an irrevocable trust, can only be tweaked or modified after it’s created with the express consent of its beneficiaries.
A revocable trust, otherwise known as a living trust, is different. You have the power to make changes whenever you like, which includes adding and dropping beneficiaries or changing the ways in which certain trust assets are to be distributed. With this option, the initial trust isn’t necessarily set in stone.
Clarify your trustees.
Let’s demystify some of the trust fund lingo. While you technically own the trust, the trustee
is the person you choose to manage the fund as outlined in the terms. In other words, they execute your wishes. If you opt for a living trust, you are the trustee, and you simply identify who will assume that role upon your death.
The trustee will be expected to invest the assets in the fund, keep accurate records and decide how to use trust money in a way that’s best for the beneficiaries. It goes without saying that it’s a big responsibility. You also have the option of outsourcing the task to a bank or some other professional trustee, but trustee services aren’t free.
The cost of trustee services varies, depending on the institution. There are also legal fees and other fund management fees to consider. Navigating all of these nuances can be overwhelming, which is why finding a trusted CFP® professional is so valuable when considering whether to set up a trust fund.
Make a plan for the distribution of trust assets.
Choosing the right type of trust and assigning a trustee are only two pieces of the puzzle. Another equally important part is making a plan for how your trust assets will actually be distributed
. Of course, this piece involves selecting beneficiaries. Your children, spouse and other surviving family members and friends will likely be beneficiaries, although you can name whoever you like — including charitable organizations that can use the assets to support causes you care about.
From there, you’ll have to decide how you want the assets to be distributed. If your children are minors, for instance, you may stipulate that funds be released slowly over time. The intention would be to help prevent your beneficiaries from spending their inheritance irresponsibly. At the end of the day, these choices are completely up to you and the way you put together your trust is something that deserves your time and attention.
Crafting the right trust fund for your specific needs is a tall order, which is why it’s so important to rally a strong team to support you. This includes a qualified estate planning attorney along with a skilled CFP® professional. The best CFP® professional will be one who understands the complexities of family ties, as well as your family’s unique values and history. Together with an attorney, they can build customized trust documents that are tailored to you.
This is for general information only and is not intended to provide specific advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax adviser with regard to your individual situation.