A common misconception about trusts is that they’re very expensive to set up and advisable only for high-net-worth families. Although the wealthy have long used trusts, they actually can be both useful and economical for even modest-worth families. Here’s a basic overview of how a trust works:
- A trust is created by you, the grantor. You write the rules governing how the trust will operate — what it will do and how and when to do it.
- Trusts can be revocable — you’ll be able to change the rules at any time. But trusts can also be irrevocable, meaning you cannot change the rules.
- You appoint a trustee, who will have the job of managing the trust and its assets. You may appoint yourself as the trustee. Trustees follow the trust’s rules.
- The trust receives gifts from a donor — and that can be you, too. You may permit your trust to receive gifts from others in addition to you or instead of you. Gifts can include cash, stocks, bonds, property, or other types of financial assets.
- Your trustee collects the gifts and invests the money according to the rules of the trust; for example, the recipient gets the money after college graduation. You may stipulate a yearly income from the trust.
- The trust has three things — the principal, which is the money given; interest and dividends earned from the principal also called income; and the profits, if any, from increases in the value of the principal, or capital gains.
- The rules you’ve written for the trust will determine who gets the income, capital gains, and the principal. That recipient is the beneficiary.
- Trusts can have many beneficiaries — family members, friends, charities, and even pets. Some beneficiaries are granted capital gains, while others get the principal. The trust states who gets what and when or under what conditions. The trustee makes sure the provisions in the trust are followed.
- Different trusts do different things, so you may opt for more than one or even four or five. With living trusts, you place assets during your lifetime to be transferred to beneficiaries after your death. They are private and help you avoid probate. Testamentary trusts are contained in your will to provide for distribution after you pass; they can be used to provide for minor children.
The only way to know how a trust can help with your family’s estate plan is to speak with a board-certified estate planning attorney. If you’d like to speak with an expert on the different types of trusts and what’s right for your individual situation, schedule a meeting now. You can schedule online or by calling (504) 831-2348.