A trust is a formal legal framework that enables assets, such as real estate or financial resources, to be managed for the benefit of the Will’s designated beneficiaries. Children’s assets are frequently held in trusts until they are of legal age to receive them. Trust funds, on the other hand, range in complexity and function, protecting assets intended for charitable organizations, retirement plans, public works projects, and more. Individuals, even those with modest income, who want to reserve assets for particular uses, can set up trust funds. To pay for their grandchildren’s postsecondary education, for instance, wealthy but not necessarily ultra-rich parents and grandparents set up college trust funds. Widowed and divorced couples getting remarried may establish trust funds to hold property for children from their first marriages in order to prevent potential family disputes.
Trust funds are sometimes seen as instruments to safeguard the riches of the very wealthy or to give their heirs—often mocked as “trust fund babies”—independent incomes, relieving them from the necessity of working for a living. However, you’ll need to work with a lawyer to create a trust. The introduction to trust fundamentals in this part will help you be ready for a more in-depth conversation with your lawyer.
Why do you need to set up a trust?
A trust may be established in a variety of circumstances, not all of which are connected to writing a Will. Trusts are typically established for one of the following reasons when creating a Will:
– to keep assets until a child reaches the age of 18 on their behalf. By doing this, the assets can be carefully handled until the children are old enough to lawfully inherit them. Certain trust arrangements permit the beneficiary to earn an income from the assets.
– to lower the taxable estate’s inheritance. The inheritance tax liability for some assets may be reduced or even eliminated by placing them in trusts. This can also help to keep the estate’s worth inside the nil-rate band.
– to support your spouse while maintaining your estate so that it can be handed on to your children.
– to prevent the sale of the family home to cover the cost of residential care.
You should consult a legal or financial expert for guidance on how a trust might operate in your particular situation.
How setting up a trust can reduce inheritance tax
Some people choose to create a trust during their lifetime and make recurrent contributions to it. They will have authority over the funds maintained in the trust and can name themselves as a trustee. Since the value of your estate is reduced because the law views the money placed in a trust as distinct from your estate, less inheritance tax is due.
A settlor, a trustee, and a beneficiary are the three major parties involved in the creation of a trust. Money, property, and other assets are placed in a trust by the settlor, who will maintain them until they are transferred to the beneficiary after his or her death.
A testator must include information about the trust and precisely what is to be contributed to it when drafting a will. You must choose a trustee and beneficiary as well. In some circumstances, it can be preferable to specify when the trust will pass to the recipient, perhaps when they become 18 years old. The trust can be transferred to the beneficiary if the trust’s settlor has died and the conditions specified in the will have been satisfied.
How many types of trust are there?
Different trust models were developed to satisfy various purposes. What kind of trust you choose will depend on the beneficiaries, the nature of the assets, and how and when you wish to distribute the assets. The principal varieties of trust are:
Fixed Trusts, where the beneficiaries are identified and the amounts to be paid to each are specified in precise proportions.
Discretionary trusts, where the beneficiaries are specified but the trustees have the authority to choose how much money to distribute to each beneficiary based on the situation.
Interest in Possession Trusts, wherein the beneficiary, like as a spouse, is permitted to utilize the asset while still alive but is required to transfer it to a different named beneficiary, such as a child, upon their death. This kind of trust may be utilized to provide for one’s spouse while maintaining the integrity of the estate so that it can transfer to one’s children. Less favorable tax rates apply to Interest in Possession Trusts than to Discretionary Trusts.
Accumulation and maintenance trusts are frequently used to give children a steady income to pay for living expenses, educational expenditures, and other expenses. When creating or administering one of these trusts, it is advisable to consult a lawyer and/or accountant as they have some complex laws and limits as well as higher tax rates.
Protective trusts mean that the beneficiary may earn income from the trust while the capital is still safeguarded. Usually, beneficiaries who are bankrupt or at risk of going bankrupt use this sort of trust.
Trusts for beneficiaries with special needs, discretionary trusts that offer beneficiaries with disabilities additional tax benefits. The compensation payments for those who are disabled as a result of personal injury are frequently held in this kind of trust.
Other types of trusts
How to set up a revocable trust?
In some cases, grantors name themselves as trustees, retaining ownership and management of the trust’s assets. A grantor trust of this kind can be utilized to avoid the expense, inconvenience, and potential publicity of an estate’s probate. Additionally, a grantor might designate a trust as “revocable” by putting a time restriction on its duration or keeping the option to terminate it. Grantor trusts have a number of uses but do not provide tax benefits.
For a trust that the grantor can revoke, the grantor is still responsible for paying any taxes that are owed on trust income, and the assets may be available to the grantor’s creditors. Grantor trusts are established by employers to identify and separate assets to support potential liabilities for employee retirement benefits. In order to prevent potential conflicts of interest, some public officials transfer their stock holdings and other investments to “blind trusts” that are handled by a third party without the officials’ knowledge while they are in office.
How to set up an irrevocable trust?
The trust is irreversible once the grantor permanently transfers ownership and management of property under the terms of a trust agreement to a third-party trustee. An irrevocable trust’s grantor no longer owns the transferred assets, is not liable for taxes on the income from or sale of the assets, and creditors cannot seize the trust assets. These trusts, which are frequently created as college trust funds and to support children and grandchildren financially, also give grantors tax and estate planning advantages.
How to set up a family trust?
Assets are frequently held under irrevocable trusts for the benefit of family members, typically children or grandchildren. These agreements may also benefit tax and estate planning. A parent is frequently named as trustee of a trust for grandkids by grandparents. A parent who is a trustee is required to follow the trust’s rules. A trust may give the trustee some restricted discretion as long as the decisions are made with the beneficiaries’ best interests in mind and not for their own advantage.
The trustees’ function
The people in charge of managing the trust are called trustees. As a result, they will acquire legal ownership of the trust’s assets and are obligated to manage them for the benefit of the named beneficiaries, such as your children. According to legal definitions, trustees have the following responsibilities and authority:
– the obligation to behave in conformity with the trust’s policies.
– a legally mandated responsibility to the trust’s beneficiaries.
– the ability to make investments for beneficiaries’ benefit.
– the responsibility to frequently assess investments and seek suitable professional guidance on how to handle them.
– the responsibility to carry out the instructions you have outlined in the trust deeds regarding the distribution of funds from the trust and the transfer of assets to the beneficiary.
Selection of trustees
If you decide to create a trust, your Will must name the trustees. You can often designate your executors to serve as trustees. It may be advantageous to name one of the guardians as a trustee if you are also designating guardians for your children.
The number of trustees you can name ranges from one to four, however it’s normally wise to name at least two. In choosing trustees, you should preferably search for someone you know who possesses the following qualities:
– reliable and sincere
– having some financial experience
– has the best interests of the recipient at heart
– can be anticipated to outlive you
In your will, you have the option to name backup trustees who will assume control in the event that your primary trustees pass away.
The trustees’ reasonable expenses may be covered by the trust. It is also feasible to name qualified trustees who are compensated with fees from the fund. The drawback of this strategy is that it would require paying professional costs out of cash that would have gone to the recipients.
How to close a trust
Any remaining trust funds can be dispersed when the principal beneficiary passes away to additional named beneficiaries or, if you like, to a charity, in accordance with the directions in your Will.
