If you’ve always thought that trusts are something for only the wealthiest people in society who have hordes of money to pass on to their children and grandchildren, think again. While it’s true that wealthy families often establish trusts for their heirs, trusts also offer advantages for people with more modest assets.
Trusts allow you to place conditions on the transfer of whatever assets you plan to give to your heirs –whether you are still alive when these assets are gifted, or if they are to be turned over at the time of your death. For example, if a grandparent plans to leave a large sum of money or a stake in a business to a grandchild, they may want to ensure that the recipient is responsible enough to manage their inheritance before they are able to receive it. In such cases conditions such as the requirement that a grandchild complete college before being able to receive their inheritance is not uncommon, or the establishment of a payout plan where a recipient must first meet certain age thresholds before they can access predetermined percentages of their inheritance.
In cases where assets are to be transferred after an individual’s death, trusts have the added benefit of efficiency. Unlike wills, which must go through probate before the assets of the deceased can be passed on to the individuals named within the will, trusts are shielded from probate and allow for the immediate transfer of assets. Given that probate can be an extremely long and expensive process in certain states, establishing a trust can be an attractive prospect for certain assets. Shielding assets within a trust is also a good way of reducing estate taxes for assets that are transferred after your death, or of lowering the gift taxes for assets transferred while you are still alive.
There are different types of trusts available as estate-planning vehicles. One example is a life insurance trust that allows for the policyholder’s heirs to avoid the expense of estate taxes since the money they inherit is paid directly through the policy at the time of the insurance holder’s death.
Given the intricacies and various types of trusts, and to avoid the possibility of unintentionally creating negative consequences, anyone considering using them should discuss whether they make sense for your situation with a financial advisor and a qualified tax attorney.