Trust funds have a bad rep—people who inherit them are usually assumed to be spoiled, entitled and ultra wealthy. And while they are in fact a good place to park cash if you’re a millionaire, you don’t have to be rich to make a trust fund a part of your financial toolkit.
In fact, if you want to make sure that your money gets to your kids without a hitch when you pass away, a trust fund is something you might consider in addition to other essential estate planning tools (e.g., setting up your will or picking your children’s guardians). Below Alexander Joyce, CEO and president of ReJoyce Financial, a financial and estate planning firm in Indianapolis, gives us all the info on setting your kid (and your cash) up with a trust.
If you have money that you want to go to a specific person in a specific manner after you’ve passed away, a trust can do that. While your 401(k) at work or your life insurance policy makes you assign beneficiaries, your real estate, cash, and personal stock accounts do not.
Perhaps you have a child with special needs that you want to make sure has detailed care if you were to pass away unexpectedly. Perhaps you’ve gotten remarried and you want to make sure that your children (but not your new spouse’s children) get your money. Or perhaps you want to make sure that your kids simply don’t blow their inheritance in one shot. For all of these scenarios, you can set up a trust with specific instructions with the help of a qualified professional.
For example, you can instruct that a trust be paid out at intervals, like when your child turns 25, then again at 35, and again at 45, and so on. Or you can specify that your money jumps a generation and goes directly to your future grandchildren, or that your kids get it only upon their retirement. Or that the money they receive may only be spent on education.
A will allocates money, meaning that it names who will be the recipients of your estate once it is divided.
A trust doesn’t replace a will—in fact, having a will is the most important part of your estate plan—because without one, the state where you live will simply divide up your property and assets as it sees fit.
Shockingly, 64 percent of Americans don't even have a will, according to USA Today. Are you among the will-less? Creating a basic will is simple.
Pro tip: Fabric Wills allows you to create a personalized will that only takes about 5 minutes and also includes instructions on how to make sure it’s legally binding.
Here is one of the biggest reasons to have a trust once you’ve set up a will: wills are subject to probate—which means that creditors, other relatives, or even your children can challenge what it says during the probate process.
For example, say your will allocates 40 percent of your estate to your son, 40 percent to your daughter and 20 percent to a named charity. Your son or daughter can legally dispute the will and try to cut the charity out. Or your daughter can sue your son if she feels she is entitled to more than she was allocated in your will. A trust, while more complex to set up upfront, can bypass the probate process.
That said, a trust in no way replaces a will, which is the only way you can name an executor or guardians for your children. Your will is the MVP of your estate plan. Having it work together with a trust can help ensure that your money not only goes to who you choose to but also does so in the manner you choose.
If you opt for an irrevocable trust, you don't have the option of later dissolving the trust fund. Once you place assets in the trust, they are no longer yours (known as the trustor). They are under the care of a trustee—which is a bank, attorney or other entity set up for this purpose.
The good news? Since the assets are no longer in your direct possession, you don't have to pay income tax on any interest made from the assets. And even if you have many years to build your wealth, you can still make sure all of your assets avoid probate (and possible arguing among family members). Your trust attorney simply sets up what’s called a living trust, which means that all of your assets pour over into the trust upon your passing.
Well-off people often use them because it creates a shield for estate taxes. Generally speaking, if assets are left to a spouse or a federally recognized charity, the tax usually does not apply.
In addition, a maximum amount, varying year by year, can be given by an individual, before or upon their death, without incurring federal gift or estate taxes; In 2018, the exemption will be $11.2 million per taxpayer. So if you’re really, really rich, a trust can be a good way to gift money without your heirs having to pay a hefty tax which is why trust funds are often associated with the one percenters.
That said, setting up a trust is complex and, as a result, has some cost to it. Most attorneys will charge anywhere from $1,000 to $5,000 to create a new trust depending on where you live and the complexities of the trust details.
You could also consider using online preparation services, such as LegalZoom or Quicken, to reduce costs. While this option can cut costs, if you do need legal advice for your specific situation or if there are complicated legal issues surrounding the way that you'd like to set up your trust, you should absolutely still consult with a licensed attorney.
Planning your estate is never fun—but everybody needs to do it. And the first step in any good estate plan starts with a basic will.
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Cari Wira Dineen is a Boston-based freelance lifestyle writer and editor. Her work has appeared in Cosmopolitan, Health and Real Simple among others, and more recently she was an editor at John Brown Media. A former senior editor at Redbook and Woman’s Day, she loves writing about parenting, health and wellness, and hanging out with her two kids.
This material is designed to provide general information on the subjects covered. It is not, however, intended to provide any specific legal advice or to serve as the basis for any decisions.
We are not a law firm, are not licensed to practice law in any jurisdiction and do not provide any legal advice. If you do need legal advice for your specific situation, you should consult with a licensed attorney and/or tax professional.
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