This article was published in the Orange Times on October 11, 2018 in the paper addition.
People set up trusts to control how their assets are managed, usually after the death of the person, called a grantor, but sometimes while they are still alive. Trusts can be used to avoid taxes, skip probate, evade creditors, distribute assets to heirs, and help underage or mentally disabled people manage inherited money. A trust can protect your heirs against the consequences of a future divorce, lawsuit or other unexpected blow.
Trusts include trustees, who are responsible for overseeing the terms of the trust, and beneficiaries, who receive the funds within the trust account. It’s a fiduciary relationship under which a grantor gives a trustee the responsibility to hold title to assets for the benefit of others (beneficiaries). Here are six steps to take in setting up a trust:
- Define the Objective. What is the purpose of the trust? Do you want to help your heirs avoid the time-consuming probate process, protect trust assets from the reach of your beneficiaries’ potential creditors (including divorcing spouses), or do you want to control the distribution of your assets after you die? Perhaps you have multiple goals.
- Determine the Type. There are many different kinds of trusts, and your objectives will dictate the type of trust you set up. A living trust controls your assets while you are alive, while a testamentary trust is created upon death through terms spelled out in your will or living trust. Trusts can be revocable or irrevocable, funded or unfunded, and there are dozens of different types within those categories.
- Fund it Properly. You can place all of the relevant assets into the trust upon creation, you can fund the trust in stages during your lifetime, or you can stipulate how the trust will be funded upon your death.
- Identify the Beneficiaries. Stipulate the persons or organizations (such as a charity) who will receive some or all of your assets and choose the time the assets will be transferred.
- Choose a Trustee. Typically, a trustee is either a family member, a professional such as an attorney or an accountant, or an institution such as a bank or trust company. You can also name yourself as the trustee and designate a family member or organization as a successor trustee, to take control when you either become disabled or die. The trustee must understand the trust and ensure your wishes are carried out.
It’s crucial to understand the pros and cons of different types of trustees. For instance, while family members may have your best interests at heart and also charge little or nothing for managing your trust, they may lack the expertise to solve conflicts that may arise among beneficiaries.
On the other hand, professionals and trust companies offer expertise and objectivity, and must meet stringent federal and state regulations. Yet they can charge substantial fees and can be impersonal and overly conservative when it comes to investing the assets in your trust, or distributing them to beneficiaries in a manner you might have desired or anticipated.
There is a middle ground: Some families name co-trustees, with a family member and a professional trust administrator sharing the duties and responsibilities. Your financial planner can recommend suitable professional trustees.