What is a trust? Per Investopedia, “a trust is a fiduciary relationship in which one party, known as a trustor, gives another party, the trustee, the right to hold title to the property or assets for the benefit of a third party, the beneficiary.”
Who doesn’t need a trust? If there are no problems with a beneficiary receiving property or assets outright from your estate, then you do not need a trust. A will in addition to beneficiary designations for all your asset accounts and property is all you need. Now if you want to place specific conditions on the distributions of assets or property from your estate, a trust is necessary.
First thing that may come to mind is the age of the beneficiary. If you know that the beneficiary will spend all the assets at one time, you can setup a trust to distribute the assets to the beneficiary over a specified number of years. For example, if the beneficiaries are minor children, you probably don’t want the children to have access to the assets until a certain age. Prior to attaining that age, a trust can be setup for the benefit of a minor child’s financial needs such as food, medical needs, clothing or even college education, to name a few. Be sure the guardian for your minor children has your best interests in mind so that the assets are not squandered. The risk of not having a trust for a minor child is leaving the funds outright to the minor, and the guardian keeping the assets for themselves or even listing their own beneficiaries.
What about grandchildren? You may want to setup a trust for grandchildren if you don’t trust their parents to setup inheritance funds for their children or even if your intention is for grandchildren to receive your inheritance. The risk of not setting up a trust is the parents receiving the assets outright and not sharing those assets with their children/your grandchildren.
Trusts are even more vital for families with children who are incapacitated or require special care due to mental or physical disability. There are special needs trusts that are setup to ensure that the child’s expenses are covered long after you have passed.
If you have many beneficiaries in different proportions and want to specify who gets what, you will need a trust. For example, if your intention is for your three children to receive an equal distribution of the assets but one child passes prior to receiving the inheritance, then you may need a trust if you desire for the inheritance of a deceased child to go to, let’s say, a charity.
And that leads to another purpose for a trust. If you are charitably inclined, there are several different types of trusts which can distribute assets to charities. As an example, you can setup a charitable trust that distributes income earned from a trust to you and your children until the recipients die, and then distribute the remainder of the trust to a charity at the time of the passing of the recipients. That is only one example of a trust setup for charitable giving. What’s a benefit of having a trust for charitable giving? Charitable giving typically entails tax deductions for your estate which can reduce taxes on the remaining estate. So great option for wealthier families. Right now, the estate tax exemption is quite high. But that could change soon, especially if no legislative changes occur prior to 2026 when the estate tax exemption drops back to $5 million from $12.06 million. A downfall for not having a trust for charitable giving is the charity never seeing the assets designated to their organization.
Other purposes for trusts include creditor protection. Depending on the state of residency, your beneficiaries may receive creditor protection on IRAs. So trusts may not be necessary for IRAs in certain states. But for other types of investment assets, including property, trusts may be necessary. For those accounts, a trust can shelter funds from being attacked in a lawsuit by a creditor. Again, being familiar with state law and the type of possible lawsuit is important to understand if you need a trust.Consult an attorney who specializes in estate planning and trusts.
Have you ever thought about the complexities that can result from blended marriages?
There is way too much to say about problems with second marriages as it pertains to inheritance. But if you want your intentions for your inheritance to stay intact after a second marriage, a trust is necessary.
Trusts are also beneficial to prevent elder abuse and fraud. Seniors can be coerced or tricked into updating their beneficiaries when they are in the hospital or under hospice care. So their intentions for their inheritance may not become a reality if fraud is involved.
As you can see, whether you need a trust or not is dependent on you maintaining control over the decision making with respect to your assets or property prior to and at the time of your passing. If that is important to you, then you should setup a trust. Bear in mind that there is a lot more to know about trusts than what I discussed in this article. If you want to inquire further about trusts, be sure to contact an attorney who is not only familiar with trusts but also state laws where you reside.
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