Trusts and Your Estate Plan

Arranging for the distribution of assets after death is not a task most people approach eagerly. It is, however, a necessary task. That's where trusts can come into play. A trust, simply defined, is an arrangement whereby one person holds legal title to an asset and manages it for the benefit of another. For estate planning, trusts may be used in several ways.

One of the most valued characteristics of a trust is its ability to bridge the gap between life and death. A trust can allow a person to "rule from the grave," so to speak. Generally, a trust may be established to last for many generations, ending 21 years after the death of the last named beneficiary, or after a specific number of years as permitted by state law.

Benefiting Yourself

During your lifetime, you could establish a trust for your own benefit. For example, you could use a trust to minimize taxes, obtain professional asset management, or accomplish other goals. You may want to participate in a new business venture with strong potential, but high risk. In this case, you could use a trust to help ensure your income in the event of business failure. As another alternative, you may set up a family trust that provides incentives for your heirs. Finally, though you may be presently capable of managing your affairs, you may choose to establish a standby trust in case your needs change in the future.

Benefiting Others

On the other hand, trusts can be established for the benefit of others, such as your spouse, parents, children, or grandchildren. Perhaps you want to provide for beneficiaries who may require the extra guidance that financial planning can provide. This is clearly the case where minors or other dependents with special needs are the intended recipients. But, trusts may also be created for the benefit of independent adults for many reasons, including freedom from management burdens, expert administration, mobility, and other practical purposes, like cash savings. While avoiding probate may be a consideration, the estate and gift tax savings associated with the use of trusts may also be important.

A trust can allow a donor to transfer assets to a beneficiary, while simultaneously shielding such assets from creditors. For example, the laws of most states permit the creation of spendthrift trusts, which may allow you to place both trust income and principal beyond the reach of the beneficiary's creditors. Generally, these laws prevent the beneficiary from assigning any part of the interest in the income or principal of the trust, since most creditors seek property that could freely be assigned by the beneficiary. Consequently, attempts by creditors to claim assets can be hindered. In the case of a spendthrift trust, you are generally permitted to use the trust assets freely, even if the result is to prevent a beneficiary from dealing with the trust's assets at will.

When using trusts, planning is essential to ensure that they are properly structured. Therefore, be sure to seek the advice of a qualified, legal professional before making any final decisions. Your legal and financial professionals can be instrumental in creating an estate plan that can help you fulfill your unique planning goals.