Long-term financial planning goes beyond considerations that affect only the principal party: it also crosses over to thoughts of providing for loved ones. One of the ways people can do that is through a trust.
Trusts are legal agreements involving a third party who holds assets provided by the principal on behalf of another. A person can use a trust to save money for a child, grandchild, charity, spouse, or anyone else to be given to them at an agreed moment.
The trustee (third party responsible for holding the assets) is given clear instruction from the principal (the person paying into the trust) on what to do with the funds and when. It usually involves the passing of assets onto the beneficiary.
What Are the Benefits of a Trust?
People choose to set up trusts for many reasons. Ultimately, the goal is to leave something to support or assist loved ones through their lives or for something specific. There are certain benefits to opening a trust as opposed to an alternative savings account:
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Assets held in trusts are more easily accessible than funds that may need to be processed through a will. This is partly because most trusts are exempt from probate (the process of selling and evaluating property and assets of the deceased before dividing inheritance).
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Fewer court fees apply to trust because they tend to be far more straightforward. The clear nature of the grantor’s intent for the trust makes it faster and easier to process.
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Some types of trusts do not count as part of the taxable estate, reducing the overall tax fee on total assets after passing away.
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A person has more control over their wealth and assets when utilizing a trust. Only they can stipulate how, when, and where the trust funds are directed.
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There is a lot of flexibility with certain trusts, allowing for personal access throughout the principal’s lifetime without losing the benefits for the eventual beneficiaries.
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Money left to someone in a trust is protected from their creditors. Suppose a person has an heir they wish to leave money to who happens to be financially irresponsible. In that case, their money cannot be claimed as repayment of debts unless approved by the beneficiary.
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Trusts can be kept private, keeping them off the public record and exempt from the court scruples that go along with it.
Other Estate Planning Strategies
Types of Trust
There are many types of trusts- each with a varying setup and set of benefits. One way to find in-depth information about every possible option is to discuss them with a financial advisor at The Kelley Financial Group. With a full understanding of specifics and goals, we can better advise on the optimal course of action.
Here are some key considerations and differences between trust options.
Revocable VS Irrevocable
Arguably the most profound distinction between trusts is whether they are revocable or irrevocable.
A revocable trust is more flexible, allows access to funds, and can be dissolved or redirected at any time. It is essentially a temporary trust that remains under the grantor’s control until the time of their death (at this point, it usually becomes automatically irrevocable). They can use the funds whenever they please or change the beneficiary if circumstances change.
Although revocable trusts are usually exempt from probate, they are subject to estate taxes and are classed like any other asset during the principal’s life.
On the other hand, an irrevocable trust is generally fully exempt from probate and most estate taxes and is not included in a person’s taxable assets. The money is protected from creditors and legal proceedings and is only accessible by the beneficiary when the terms are met.
Once an irrevocable trust is established, it cannot be altered or dissolved. The grantor cannot access the funds or amend their wishes for their distribution.
Funded VS Unfunded
A funded trust has money paid into it during the principal's life, but an unfunded trust is empty with only the terms of the arrangement. Usually, unfunded trusts have funds paid in upon the grantor's death but not before.
The idea is that money from the estate goes into the trust and is then subject to the terms, but it can get complicated if someone fights the will or other financial complications arise. Speak with an advisor to better understand the risks and benefits of each option.
Living VS Testamentary
Trusts are not only applicable to leave money to loved ones after death. They are also used to provide support while the grantor is still alive. A living trust (inter-vivos trust) controls and distributes assets to beneficiaries, but the actual ownership remains with the grantor.
The principal can dedicate certain funds to a living trust for the beneficiary’s use within the terms and conditions. When they die, the ownership of any assets dedicated to the trust passes to the beneficiary.
A testamentary trust only comes into play after the grantor passes. It is also known as a will trust because they tend to be appointed through the final will and testament of the principal.
Charitable Trusts
Anyone can be named the beneficiary of a trust. Many people set up a charitable trust through which they support organizations financially before and after death, depending on the terms.
Spousal Trusts
People may choose to set up a marital trust or bypass trust- both designed to benefit a surviving spouse. There are differences relating to the surviving spouse’s taxable estate, so it is important to understand the difference.
Life Insurance Trust
An irrevocable trust can protect a life insurance policy from certain tax penalties.
Choosing a Trust
Generally speaking, trusts are complex fiduciary arrangements that require careful consideration and planning. Choosing the correct trust can be difficult without understanding the inner workings and stipulations.
At The Kelley Financial Group, professional trust advisors with detailed knowledge of how things work are waiting to assist and advise. Leaving something to support loved ones is the goal for many people, and trusts are a way to make it happen- but only if used correctly.
Speak To an Advisor Today
Contact The Kelley Financial Group today for advice on setting up a trust and how to get the most from your assets.
This material was prepared for The Kelley Financial Group’s use.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.
The Kelley Financial Group and LPL Financial do not offer tax or legal advice or services. We suggest that you discuss your specific situation with a qualified tax or legal advisor.