When you think about estate planning, you might automatically think about making a will or naming beneficiaries for your retirement plans. It’s also important to consider when to create a trust, because your life is unique. You have situations that may require special attention.
It brings peace of mind to know that the care you have provided the people and possessions you love can continue. That's why many people learn how to set up a trust. There are many types of trusts, but here are the basics: A trust is a legal document that can help you transfer your savings, investments, home or other assets to beneficiaries, often with tax benefits.
When to create a trust?
Consider setting up a trust if you want to:
- Protect assets from creditor’s claims.
- Establish a tax-advantaged charitable gift.
- Avoid potential costs and delays associated with probate, and manage your estate tax exposure.
- Provide an orderly way of managing your finances if ill health stops you from doing so.
- Ensure that your assets are managed for the benefit of your heirs, according to your wishes.
Here are some ways different types of trusts can be beneficial in a variety of circumstances:
You have a loved one with a disability
You’ve devoted your time and energy to ensuring that your loved one with a disability has a good quality of life and receives the type of care they deserve. Help make sure they’ll continue to be cared for after you’re gone. You can set up a special needs trust to leave money or property without jeopardizing critical benefits. Make sure to appoint a trustee who will look out for this person’s best interests.
You are divorced and have children
If you're divorced and have young children, there are benefits of having a trust fund now and later. This helps make sure your ex has the money he or she needs to take care of your children until they are grown, including any educational expenses you had planned to pay. It can also help your kids get their inheritance once they’re adults. Also make sure you’re up-to-date: If you created a trust before your divorce or have other assets with their own beneficiary designations, like a retirement plan at work, update your beneficiaries to match your current wishes.
You have adopted children
If you’ve adopted a child, not only must you select a guardian, but you may want to add special provisions. If you had an open adoption, be sure to select a guardian who would be capable of maintaining the relationship with your child’s biological parents. The advantages of a trust include being able to provide directions important to you about your child’s upbringing, such as exposing them to your family’s heritage. By placing assets in a trust, your trustee can help make sure that your assets pass directly to your child.
You have pets
Let’s be honest—your dog is part of your family. You can provide for your pet’s care after you’re gone by creating a pet trust. You can specify who will care for your pet and set aside money to do so. One advantage of a pet trust is that it typically provides monthly payments to the animal’s caretaker for the life of the pet or 21 years, whichever comes first.
You have an art collection
Your art collection has taken years to build, taking you to amazing places along the way. Be sure you address it when you think about how to set up a trust. You can leave specific pieces to specific individuals, to a museum or to a nonprofit organization. Retain important documents such as bills of sale, certificates of authenticity and insurance appraisals.
You have a loved one with an addiction or mental illness
If your loved one struggles with an addiction to drugs or alcohol, you may be wary of leaving him or her money in your will. There are other options for you to still provide care. Create a trust with rules and conditions for how your loved one would receive the money. You can specify that the money not go directly to the individual but rather be paid directly to a landlord, educational institution or medical providers.
You own a business
You didn’t build your business overnight. How can you make sure it succeeds if something unexpected were to happen to you? Use a trust to designate who would make financial decisions for the business after you’re gone. You can also consider how to create a trust with a succession plan so your business can keep running without having to go through probate. This can be especially important if you’re not sure how other family members will react to change or if you have a business partner you don’t see eye to eye with anymore. Think ahead and discuss the matter openly with your potential successors to ensure that they are ready and willing to accept the role.
Other times for trusts: revocable vs. irrevocable trusts
Even if the categories above don’t apply to your situation, there are still reasons why you may want to set up a trust to to protect and share your assets. A revocable trust, for example, may help keep your assets safe from creditors in the event of bankruptcy or another financial issue. A revocable trust gives you the ability to change the terms of the trust or to revoke the trust entirely at any time. This is the main difference between a revocable trust and an irrevocable trust (which can be created for certain gift or estate tax planning benefits during your lifetime or at death). An irrevocable trust cannot be modified. Typically, a revocable trust would let you receive all of the benefits of the trust assets (the trust income and the right to use trust assets) as you choose during your lifetime. Following your death, the trust assets would be distributed in the manner you’ve directed through the trust terms.
The difference between trusts and wills
You may also find tax benefits to trusts, depending on your situation. With a generation-skipping trust, for example, you may be able to give assets to grandchildren tax free. If you’re worried about privacy, it’s good to know that your heirs can typically settle a trust privately. In contrast, a will typically becomes part of the public record when it’s settled through a court process called probate—and your loved ones may have to meet with a judge.
Wondering how to create a trust that might be right for your individual situation? Check out this helpful guide to the different types of trusts.
3 easy steps to create a trust
- Talk to a lawyer with experience creating trusts—typically an estate planning attorney—about your personal situation. Explain what’s most important to you and what your concerns are. He or she can help you understand the benefits of a trust and choose a type that will work for your particular needs.
- Make sure you find the right trustee—and don’t be afraid to name co-trustees. The trustee manages the distribution of assets from the trust according to your wishes. To create and implement a trust effectively, you need to name a trustee who you can count on to carry out your intentions. Your trustee should be responsible, reliable, and also have the required experience and expertise. He or she should also be able to communicate with beneficiaries.
You may choose an individual to serve that role or find that a corporate trustee makes more sense. You may want to consider a corporate trustee if your trustee candidates feel overwhelmed by the responsibilities, don’t have the sufficient resources to meet all of the trustee’s duties, or simply would appreciate having a professional involved to assist them.
- Start moving assets into the trust when your attorney recommends doing so. No one will get the benefits of a trust fund if it's empty, so be sure to retitle assets to reflect that the trust now owns them.
Creating a trust may take longer than drafting a will, and it may be a little more expensive at the start, but when it comes to having the confidence that your wishes will be fulfilled and your loved ones will be taken care of the way you want, it’s worth taking the extra time to make sure you get it right.