When you think of trusts, you probably imagine some wealthy family living off the funds of a tycoon ancestor. And, while there are plenty of “trust-fund babies,” you don’t need considerable wealth to create a trust fund. There are plenty of good reasons why anyone should consider making a trust fund a part of their estate plan.
A trust is a legal arrangement where the assets’ owner, the grantor, passes control of the assets to the person known as the trustee. The trustee holds and manages those assets for a third person, the beneficiary.
The different types of trusts
There are several types of trust funds, each with its benefits and drawbacks:
- Revocable trusts can be altered, changed or revoked during the grantor’s lifetime.
- Irrevocable trusts, once established, can not be changed or revoked with the beneficiary’s consent. While irrevocable trusts offer less flexibility, they can protect assets from creditors.
Other options to consider include:
- Testamentary trusts only come into effect after the grantor’s death. They allow you to set up certain conditions, such as the beneficiary reaching a certain age. However, unlike living trusts, the assets in testamentary trusts may need to go through probate.
- Charitable trusts are set for the benefit of a particular charity or benefit the public in some way.
- Grandparents can use generation-skipping trusts to transfer assets to a future generation, such as their grandchildren. Money from a generation-skipping trust is generally tax-free.
- Special needs trusts are for people with disabilities and are designed so that they can still benefit from the trust without losing their government benefits.
Trust funds can be a tool for managing your assets and securing your family’s generational wealth. However, many factors go into creating trust funds. Therefore, it’s best to work with someone who will make sure your trust is legally sound.