Trusts are an increasingly popular estate planning tool, as they provide many benefits. Trusts permit property owners (the “Settlor”) to transfer assets out of their individual name, to a trust, where the assets can be handled, managed, and ultimately passed to successor beneficiaries.
Here are some of the most common reasons for creating a trust:
- Control and Flexibility: Rather than gifting a pot of money outright to beneficiaries after death, a trust allows the Settlor to determine how often distributions are to occur, and while the funds are held, it can be kept invested by an experienced professional or a responsible family member. Therefore, the Settlor can control (or give the trust manager the flexibility to decide) who shall receive, how much, how often, and even for what purpose the funds shall be used for, such as health or education.
- Protection for Beneficiaries: Holding property in a trust for beneficiaries can keep it protected, not only from the beneficiaries own (perhaps excessive) spending habits but also from the beneficiary’s creditors or possibly a beneficiary’s spouse (or ex-spouse).
- Minor Beneficiaries: Since minors lack capacity to manage their own money, a trust allows you to gift assets to minors, which can be held and invested for them, without the need for a court appointed guardian or conservator to manage the funds on behalf of the minor.
- Avoidance of Probate: Probate is a court supervised process that is sometimes required to transfer property out of a deceased property owner’s name. By transferring property during life into a trust, the property is no longer part of a person’s probate estate. By avoiding probate, it saves time and money, gets assets into the hands of beneficiaries quicker, and because it does not involve the court, it keeps the transaction private.
- Tax Benefits: Although the federal estate tax exemption is currently at $11.7 million, a record high, trusts can still be utilized for tax benefits. For example, income producing property can be transferred to a trust that pays to beneficiaries in lower income tax brackets, generation skipping trusts allow grandchildren to avoid the estate tax, and certain advanced irrevocable trusts can keep trust property out of a Settlor’s gross taxable estate, for purposes of measuring the estate tax.
Despite these benefits, trusts are not for everyone. The downside might be the time and cost involved with creating the trust, transferring assets to it, and the costs involved with the trust’s ongoing administration. Therefore, some people prefer to use a simple last will and testament as well as payable on death (“POD”) beneficiary designations – in order to transfer assets after death. However, wills and POD designations each have their own challenges.
If you would like to discuss estate planning options and your specific situation, please contact us at Braun Cathie Kruzel.