When I discuss trust funds with new clients, it often elicits a range of emotions. Many people equate trust funds with spoiled children or the very wealthy. However, there are many different types of trusts, and as a new parent, a trust could be a smart way to ensure that your loved ones are taken care of in the future.
What exactly is a trust fund?
A trust is formed when a person gives their assets to a third party for someone else's benefit. In this example, the person giving away the assets (the grantor) would hand them over to a trust-worthy third party (the trustee/custodian), who would look after the assets for the sake of the future recipient (the beneficiary).
The main benefit of setting up a trust fund is that it could offer protection from lawsuits, lower taxes, or avoid probate after a grantor dies. However, there are costs associated with setting up and maintaining a trust fund, which is the main reason why they aren't suitable for everyone.
Types of Trust Funds?
Most trust funds can be divided into a few different categories: living or after-death, and revocable or irrevocable. For example:
- A living, revocable trust is set up while the grantor is still alive and the assets are revocable, which means that the grantor can amend the trust or pull the assets back at their discretion
- An irrevocable trust is one that can't be changed after it's created, which generally offers tax benefits because the grantor is legally giving away their assets at the time the trust is established rather than at their death.
- If the trust were set to be irrevocably created at the grantor's death, then it would be referred to as a testamentary trust.
Special Types of Trust Funds
Some trust funds are designed to address a specific need or concern. Some of the most common ones are:
- Spendthrift trusts limit the beneficiary's access to the trust fund's money so that they aren't able to make poor decisions with it. Instead, the trustee decides how the funds are used for the beneficiary's benefit.
- Education trusts only allow for the trust fund's assets to be used for educational expenses - we rarely see these as UTMA's are generally cheaper and easier to set up.
- Gift trusts allow for high-end or expensive gifts to be given - though, we also rarely see these because a gift would have to be very expensive, maybe $100,000- $200,000, to be worth establishing a trust for.
- Special-needs trusts are designed to establish care for a family with a special-needs child. This is because it is nearly impossible to leave money to a special-needs child, a trust for this purpose helps to allow a smooth transition of funds from the grantor to the beneficiary.
- Charitable trusts are more common and are usually set up as an irrevocable trust, either living or after-death, to oversee and distribute assets to one or more charitable organizations.
Is a trust fund for me?
Well, as a new parent, there are two main reasons why you might want to get a trust:
- Estate planning -- regardless of your level of wealth, any family with young children should have some sort of estate plan in place, which could very likely include a living or testamentary trust.
- Divorce -- rarely brings out the best in people, and a trust set up for your children may mean that their inheritance can't be seized or misused by your former spouse or their new partner down the road.
Trusts are very flexible and can offer a lot of benefits, but there is a price to pay for them -- generally in the way of billable hours to your lawyer and the cost of regularly maintaining and managing the trust. However, it's tough to put a price on financial security and peace of mind.
If you think a trust might be an option for you or your family, please feel free to reach out to us for a free consultation.