While there are many reasons why people set up trusts, a few of the top ones include asset management and control, tax planning, and asset protection.
Asset Management and Control
Trusts provide an option for a Trustor or Grantor to leave assets in trust, to be managed by a trustee according to the terms of the trust. This provides an option for a Trustor to leave assets to beneficiaries to be used for certain purposes, or paid at certain times. Some examples include assets being left for the purpose of paying for educational expenses, formation of businesses, pursuance of certain hobbies or investments, events such as weddings, or for simple maintenance and support.
Trustors can also opt for beneficiaries to receive certain percentages of each beneficiary’s share at different ages. This helps to prevent assets left to other generations from being blown through or spent on frivolous things. Surveys have shown that when assets are left to other generations or beneficiaries, frequently they go out and buy a new car within one week. Many people choose to leave amounts such as 25% of a beneficiary’s share to be distributed at the age of 21 and 25, and 50% at age 30.
A pet trust can also be established to leave funds held in trust to care for pets after one is deceased. This is a great option to utilize to ensure that your pet is provided for under the terms you detail if anything unexpected occurs.
Charitable trusts are also frequently established where individuals wish to leave funds to charitable organizations.
Tax Planning
Many individuals choose to establish trusts in order to shelter their assets from federal and state death tax liability. Some frequently used types of trust are credit shelter trusts, marital trusts, and life insurance trusts. A revocable living trust can also be named as a beneficiary for life insurance policies, which can eliminate federal estate taxes on the life insurance proceeds because the death benefit is kept out of one’s taxable estate.
Assets held in a revocable living trust also generally receive a step up basis, which can eliminate capital gains taxes for beneficiaries. This is because when a Trustor transfers assets into a revocable trust, the assets have the taxable basis that they had when the Trustor purchased them. These assets appreciate in value when being held in the revocable trust with the same tax basis as when the Trustor purchased them. Upon the Trustor’s death, when these assets are transferred from the trust to the beneficiaries, it is not considered a “sale” or “gain” for tax purposes. The beneficiaries receive the assets at their full value, which is the tax basis for them, and they do not need to pay taxes until the assets are sold and they receive a gain. This allows a trustor to give beneficiaries several hundred thousand dollars tax free.
Asset Protection
Trusts can also be used to protect assets from a beneficiary’s creditors by including a spendthrift provision. This is because the assets are held by the trust, in the trust’s name, and not a beneficiary – so creditors cannot reach the assets. A trustee manages the assets in accordance with the terms of the trust that the Trustor provides, which can include transfer restrictions (so a beneficiary cannot transfer their assets to someone else), how and when a beneficiary receives assets (such as a payment schedule), and can provide long term asset protection.
Are you interested in setting up your own trust? Contact us today to discuss your goals and the best options in how to achieve them!
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