Part of the purpose of earning money and acquiring assets in your life is to leave it behind to loved ones and causes that are important to you. There are a number of ways to do this. You can simply draft a will that says one person gets your car, another gets x dollars, and someone else gets y dollars.
For the average person, this sort of will is fairly straightforward and won’t cause a lot of confusion. Once the money is disbursed, the heirs are free to spend it however they choose, or redistribute it to other people in their lives as they see fit.
Many people are comfortable with this scenario, and that’s fine. If you fall into this category, there’s a good chance a trust won’t be necessary, and it may be an expense you prefer to avoid, since it does cost more in legal fees than a will.
A matter of control
For those who do choose to put some or all of their assets into a trust account, the desire to keep control over the money is often a driving factor to their decision.
Those with more money are more likely to choose to have a trust because it allows them to leave funds to their heirs while creating certain provisions regarding when they have access to the money. People who want this control can gain a sense of peace knowing that their life’s work won’t be squandered on a few frivolous purchases.
Living and testamentary trusts
Trusts fall into one of two basic categories, living and testamentary.
A living trust is one that goes into effect while a person is still alive. Many living trusts are revocable, and can easily be changed by the person who holds them during their life, if they change their mind. A living trust might also be irrevocable, which means it is more difficult to alter because the trustee and beneficiary both need to agree to any changes.
A testamentary trust is one that goes into affect after a person dies, and is often included within the actual will. Common trusts of these types involve holding an inheritance in a financial account until beneficiaries reach an age where the giver believes they will be responsible enough to handle the money, or to prevent an irresponsible parent from misusing the money before the beneficiaries are old enough to control it themselves. Some trusts even allow inheritances to be handed down in installments that can last for decades.
If you do choose to set up a trust, there are several options available of specific types of trusts. Which of these is appropriate depends on what your specific concerns are regarding your estate, tax considerations and the needs of your family long term. Some of the more common concerns include:
- Avoiding estate taxes: A Credit Shelter Trust (CST) may be a good choice if you are worried about an inheritance being significantly reduced by estate taxes. Married couples might use this when they have sizable assets, and they stand to be each other’s primary beneficiary. Both spouses would set up their own CST. Whoever dies first will have their money go into a trust and disperse an income to the other spouse, rather than having to pay taxes on a large sum. When both spouses are gone, the CST can pass on to their children, and they will not have to deal with paying large estate taxes
- Taking care of grandchildren: If you know you are leaving plenty of money for your own children and your grandchildren to benefit, you might want to consider a Generation Skipping Trust (GST). This doesn’t mean you are “cutting off” your own kids. While the money is technically reserved for the grandchildren until they reach the age you specify, you can allow your own children to draw a reasonable income from the trust until that time.
- Caring for your heirs, and your spouse: After you pass away, life will eventually go on for your spouse. If they are young enough, they may even remarry and have additional children. If you are leaving behind a sizable estate, it is natural to want your own kids and grandkids to benefit, but you want your spouse to be okay too. A Qualified Terminable Interest Property Trust (QTIP) may be the answer. This works in a similar way as the Generation Skipping Trust, only it is your spouse who is drawing income from your children’s trust.
- Wanting the money to last: No matter who you leave money to, you might worry that it will be squandered. This can be a real concern if you have young children or teens. An IRA Trust can help prevent this. This take the money in your IRA and delivers it in installments which can continue in a modest amount for many years to come.
Regardless of your plans, it is best to make them with the help of an experienced estate planning attorney. The truth is that laws are complicated and any mistake can prove costly to you and your beneficiaries.