As they are increasing in popularity for families and individuals with estates of all sizes, more people are reaching out to better understand trusts. They usually have questions like; what exactly is a trust? How does it fit into the estate plan? What are the benefits? What are the downsides?
For many, the idea of a trust seems complex. This is not the case. In my experience, trusts are as complex or as simple as the people who are putting it in place. The options are endless, but the reality is that a “simple” trust is most appropriate for many families, and it serves as an economical tool for their estate planning.
So, what is a trust? A contract! A trust is really just a contract for the management and distribution of your assets. Your trust outlines what assets are being managed (typically your home, and other real estate, and your bank accounts), for whose benefit (usually yours, during your own lifetime and then your kids, or whoever you choose as beneficiaries), and how the assets are to be managed during your lifetime and distributed after your death.
But, aren’t there different kinds of trusts? Yes, there are two basic types; revocable or irrevocable. In most cases, a Revocable Living Trust is the type that is used. It provides utmost flexibility, and can be easily changed. An irrevocable trust can only be set up in certain, limited circumstances, one common example being for a disabled beneficiary (someone who is on government disability benefits, or for a minor, for example).
To better grasp the difference, I frequently use the example of a piggy bank vs. a safe. The Revocable Living Trust is like a piggy bank, because throughout your lifetime you can add assets to your “piggy bank” and you can remove them, just as easily, should you choose to (i.e., you want to sell your home and purchase a new property). Whereas, an irrevocable trust is like a safe and a third-party is holding the key. That third-party must consent and participate in the transfer of assets, and the trust must approve that action. Due to the limited nature of irrevocable trusts, they are less flexible, but can provide asset protection, making this worthwhile in those appropriate circumstances.
For many families, the revocable living trust is a great option for the following basic reasons;
1. It is flexible and can be changed easily throughout your life (so, if you change your mind about when distributions should be made to your kids, or if you need to split your assets differently, etc it simply requires an amendment to your trust. Short, sweet and affordable.)
2. A trust-based plan should be set up to avoid court after you pass away. Because the trust (AKA contract) already outlines what you want to be done with your assets, there is no need for a judicial determination to allow your instructions to be followed, in most cases. This typically is a down-the-line savings of thousands of dollars (probate usually costs $2,000++).
3. Provides peace of mind. Know that your rules are laid out, and you’ve chosen the people who will help manage your finances and affairs, and it’s not being left up to a court or chance.
For many families who are looking to set things up properly (especially when kids are still under 18), to stay out of court (many don’t like the time and expense associated with the court process), these are the questions that will be answered and identified in the trust:
1. Who should manage your money and property if something happens and you are no longer able to?
2. When you (or both of you) have passed away, who should manage assets then?
3. If you have small children, who is to be their guardian?
4. Do you also want the guardian to manage financial assets, or would you prefer to give that job to someone else? (A common option people take advantage of, and didn’t realize they had)
5. Assuming something happens while your kids are still young, how would you want them to receive distributions and on what schedule? (Even for families with small or modest estates, the planning for distributions to kids may include life insurance proceeds, etc) Many choose simple distribution schemes like;
1/3 @ age 25
1/3 @ age 35
1/3 @ age 45
This is just an example, and you can change this to suit your family and your child, and this is a great example of the provisions that families update as their kids grow older and we see their tendencies (or lack thereof) for good financial management, etc.
I hope this helps, feel free to reach out with any questions!
